WASHINGTON — As long as there has been a federal income tax, taxpayers have been able to deduct most of the state and local taxes they pay from earnings subject to Uncle Sam’s grasp. But that deduction – especially popular in states rich in Democratic voters – could disappear as soon as next year if President Trump and congressional Republicans succeed in their promised rewrite of the tax code.
The state-and-local-tax deduction, or SALT, has long been a target for tax policy wonks who see it as an unwise federal subsidy that is mainly claimed by the wealthy. But politics have always intervened: Thanks to the opposition of lawmakers in high-tax states, the deduction has survived every effort to clear out loopholes, including the last federal tax overhaul of similar ambition in 1986.
Now, Republican leaders have made clear the SALT is on the table, and it has shaken up a number of blue-state Republican legislators who are warning that it could derail the tax plan Trump is pushing.
“I intend to fight it with everything I know how,” said Rep. Tom MacArthur, R-N.J., who represents a district where 43 percent of tax filers claim the SALT and signed a bipartisan letter to Treasury Secretary Steven Mnuchin urging him to preserve the break. “It’s a big deal for states like ours.”
The incentives to eliminate, or at least chip away, at the deduction could be impossible for congressional tax writers to ignore. Republicans are hoping to drive down both individual and corporate tax rates using special congressional procedures that will require their plan to not increase the deficit in the long term. Doing so means offsetting the costs of rate cuts by closing loopholes, and few of them yield more revenue than the SALT.
Last year, the congressional Joint Committee on Taxation estimated its cost to the Treasury at $368 billion through 2020, and the Congressional Budget Office reported that simply capping the deduction would cut deficits by $955 billion over a decade.
The other individual tax provisions whose elimination could generate close to that revenue are even more politically sacred – including the favored treatment for retirement savings, employer-paid health care premiums, investment income and mortgage interest.
“It’s really hard to envision tax reform that’s worth writing home about, that’s done revenue-neutrally, without including this,” said Ryan Ellis, a conservative tax lobbyist. “It’s very, very difficult to envision how you would piece it together. We’ve taken so many hits on everything else.”
That is a reference to the demise of other potential “pay-fors” to offset the Republicans’s rate cuts, including a “border adjustment” tax on corporate expenses. That proposal, favored by House Speaker Paul Ryan, R-Wis., might have raised a trillion dollars over 10 years but generated fierce opposition from some businesses.
Now Ryan, who is eyeing the SALT, has made the conservative policy case for eliminating the deduction.
The deduction favors states where taxes are relatively high, and where incomes are high enough to make it worthwhile for taxpayers to itemize deductions and claim it.
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