WASHINGTON – Millions of Americans would lose a prized tax break under President Donald Trump’s sweeping revamp of the tax code, but corporations would get to keep it.
The Republican proposal would eliminate the federal deduction for state and local taxes, a widely popular break used by some 44 million Americans, especially in high-tax, Democratic-leaning states like New York, New Jersey, California and Illinois. But corporations, which pay billions in local property levies and state income taxes, wouldn’t be affected.
Republicans are determined to overhaul the nation’s tax system by year’s end, offering a plan that lowers the corporate tax rate from 36 per cent to 20 per cent and reduces the number of tax brackets. Trump and the GOP cast the plan as a boon to the middle class.
Meeting at the White House on Wednesday with members of the tax-writing Senate Finance Committee, Trump said, “this is a once-in-a-lifetime opportunity, in my opinion.”
Democratic members of the committee remained united in opposition to the current plan, said Sen. Ron Wyden of Oregon, the top Democrat. He said their message to the president was: “You fix it (the tax system) with real tax relief that helps the middle class. You don’t give tax cuts to people like him (Trump).”
Toward the end of the meeting, Trump issued a thinly veiled threat to Democratic senators, according to Sen. Sherrod Brown, D-Ohio. Most of the Democratic members of the tax-writing Senate Finance Committee who were invited are up for re-election next year in states Trump won in 2016. Brown is among them.
Brown said Trump told them, “I couldn’t imagine being a Democrat and running in 2018 having voted against” the GOP tax legislation.
The plan is still evolving with lawmakers filling in the blanks, but the proposed repeal of the state and local deduction has divided Republicans.
Ending the deduction would affect individuals and companies unevenly.
If Amazon, now being frantically courted by dozens of cities, decided to locate its new second headquarters in Westchester County north of New York City, an affluent suburban area in one of the highest-tax states, the tech commerce behemoth still would be able to claim state and local taxes as a regular business expense, on par with items like buying machine parts.
But the company’s employees living in the area wouldn’t be so lucky: They’d take a financial hit from losing the ability to deduct their state and local taxes from their federal income calculations.
Trump and his Republican partners in the nearly $6 trillion tax overhaul plan push back against the idea that it would benefit mainly wealthy people and corporations. And they say the rest of the country shouldn’t have to subsidize wealthier states like California and New York whose residents use the state and local tax deduction in large numbers. Defenders of the state-local deduction, including several GOP House members, say repealing it would hurt low- to mid-income taxpayers, subject them to being taxed twice and enable a federal revenue grab on the backs of homeowners who pay property taxes.
The bare-bones tax framework leaves a pack of details to be determined by Congress. Yet the blueprint as written indicates that the deduction of expenses deemed an “ordinary and necessary” cost of doing business would mostly remain, and would continue to include state and local tax payments.
The only business deduction specifically set for elimination is one that allows U.S. manufacturers to deduct costs related to production such as building plants.
Several experts confirmed that reading of the tax framework, including Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. Rosenthal, who previously worked as legislative counsel to Congress’ Joint Committee on Taxation, said he expects lawmakers to continue to allow the business expense deduction.
As with many aspects of the Republican tax plan, “the money basically goes to corporations and big business. It’s unfair,” said Rep. Bill Pascrell, D-N.J., a member of the tax-writing House Ways and Means Committee.
To be sure, small businesses too can deduct state and local taxes as business expenses. But many more billions of dollars are at stake for large corporations, especially those with plants and operations in high-tax states.
Trump and the tax plan’s Republican architects eye the roughly $1.3 trillion in lost revenue over 10 years that the state and local tax deduction costs the government. They want to recoup it to help pay for the deep tax cuts, especially for business, proposed in the far-reaching plan.
At its core, the overall plan would double the standard deduction, to $12,000 for individuals and $24,000 for families; dramatically cut taxes for corporations and potentially for individuals; shrink the number of personal income brackets; and simplify the tax system.
Trump and the Republican leaders promise that the plan would benefit middle-class families by lowering tax rates, creating new jobs and sparking economic growth. But there are too many gaps in the proposal to know how it actually would affect individual taxpayers and families, how it would be paid for and how much it might add to the soaring $20 trillion national debt.
The chief architects of the tax plan in Congress say nothing is written in stone. Spokeswomen for the leaders, Rep. Kevin Brady, R-Texas, chair of the House Ways and Means Committee, and Sen. Orrin Hatch, R-Utah, who heads the Senate Finance Committee, declined to comment specifically on the divergent treatment for companies on state and local taxes.
They did point to earlier statements by the two Republican leaders indicating that everything in the tax framework is subject to change. Hatch will work with members of his committee to examine all aspects of the plan and decide on possible changes, said spokeswoman Julia Lawless. Brady has signalled willingness to compromise on full repeal of the state and local deduction.