Issues, Tax

If Congress won’t eliminate the state and local tax deduction, then cut spending

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The Trump administration and Republican Congress have released their blueprint for tax reform, which would result in net tax reductions of $2.2 trillion according to the Committee for a Responsible Federal Budget, and already the plan is running into some resistance among Republicans.

Image Credit: Chris Potter CC by 2.0

This time, the hold-up could be over the elimination of the state and local tax deduction.

“The members with concerns from high-tax states have to be accommodated. This has to be dealt with,” said U.S. Rep. Peter Roskam (R-Ill.) in an interview with the Wall Street Journal, a member of the House Ways and Means Committee.

That committee’s chairman, U.S. Rep. Kevin Brady (R-Texas) appeared to agree with Roskam, saying, “It’s crucial that we deliver tax relief for every American regardless of where they live, including in those states that have high state and local taxes.”

Just like that, a so-called pay-for under the Byrd Rule — a Senate rule that requires budget reconciliation bills that only need a simple majority to pass to be deficit-neutral — is very much in question. This one happens to be worth anywhere from $1.3 trillion to $1.8 trillion.

Now, in the vast majority cases, according to the White House, this will not even apply since 70 percent of tax filers use the standard deduction. And afterward, many more would since the plan also doubles the standard deduction to $12,000 for individuals and $24,000 for married couples. And then individuals could find their rates dropping as well in the new tiers of 35 percent, 25 percent and 12 percent, and corporations would have their tax rate cut to 20 percent.

So for most people, despite losing the state and local tax deduction, it will be more than made up for by doubling the standard deduction. According to the Committee for a Responsible Federal Budget, doubling the standard deduction would save taxpayers $700 billion, and lowering the individual rates would save another $1.7 trillion, totaling $2.4 trillion in savings.

That more than offsets the state and local tax deduction. But in certain higher tax regions, this might not be true.

In at least one of those higher tax areas in Suffolk County, N.Y., that could be a problem for U.S. Rep. Lee Zeldin (R-N.Y.), who told his constituents on Facebook on Sept. 27, “I will be assessing the impacts of all proposals, including the debate over whether or not, and how, to maintain the State and Local Tax Deduction, to make sure the final proposal is not just good for America, but most specifically, to make sure the final proposal is good for NY-1.”

Right off the bat, representatives in key swing districts that comprise the Republican majority in the House were unable to tell their constituents if they’d be saving any money on their taxes as a result of the plan, and appear to be leaning towards preserving this particular deduction.

If this experience plays out throughout New York, California, Illinois and other higher tax states, with the House Ways and Means Committee already sending strong signals, the state and local tax deduction may very well end up staying in the tax code.

Meaning, to keep these marginally lower rates, Republicans will have to find anywhere from $1.3 trillion of $1.8 trillion of other budget offsets to comply on paper with the Byrd Rule.

If so, then an alternative that ought to be considered are spending cuts. To which, President Trump put forward a budget that cuts spending $4.5 trillion over 10 years, which if Congress is unwilling to eliminate the state and local tax deduction, must take a look at. There’s even an incentive, the bigger the spending cuts, the bigger the tax cuts that can be achieved on budget reconciliation.

Otherwise, Republicans might find themselves reducing the amount of rate reductions to such a degree that the net tax cut in the plan is not big enough to make much of a difference for the economy, which has not grown above an inflation-adjusted 4 percent since 2000, and not above 3 percent since 2005.

Right now, at $2.2 trillion of net tax reductions, the tax plan stands at 1.1 percent of the Gross Domestic Product, second only to the 1981 Reagan tax plan at 2.89 percent. That’s a decent sized tax cut, but it the President cannot afford for it to be smaller after promising in May that “We’re proposing one of the largest tax cuts in history, even larger than that of President Ronald Reagan.  Our tax cut is bigger.”

To help keep Trump’s promise, then, Congress needs to find enough room in the budget for the tax cuts. If that won’t include the state and local tax deduction, then the only thing left to do is to cut spending.

This is a guest post by Robert Romano Vice President of Public Policy at Americans for Limited Government.

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