Trump’s plan to eliminate State and Local tax deductions may have been prompted by an initial assumption that such a move would mostly hit blue states.
In what may be the final nail in President Trump’s tax reform proposal, months after the White House proposed ending a tax break for people in high-tax states – which would suggest Trump had more than enough time familiarize himself with how it all works – Trump reportedly “grew angry” when he learned that the change would hurt some middle-income taxpayers, Bloomberg reports citing people familiar with his thinking.
As Bloomberg amusingly adds, “It’s not clear why the president didn’t know the implications of the SALT deduction for middle-class taxpayers when the plan was released.”
Trump’s confusion appears to have led to even more confusion everywhere else: according to Bloomberg, Trump’s concerns led him to say this week that “we’ll be adjusting” the tax-overhaul framework, but it’s not clear how he and congressional leaders would make up for the $1+ trillion in revenue that would be lost without ballooning the deficit or torpedoing support for the plan among hard-line conservative Republicans. Meanwhile, Trump’s top economic adviser Gary Cohn said Thursday morning that the president “is not rethinking his position on repealing the state and local tax deduction” contradicting what Trump himself said previously.
In any case, while the plan to eliminate State and Local tax deductions may have been prompted by an initial assumption that such a move would mostly hit blue states as shown below…
… the realization that it would have a dire impact on Republican politicians in NY, NJ and CT may have given Trump reason to reevaluate.
The White House press office on Wednesday night declined to comment on internal deliberations, but released a general statement that said in part: “The president has made it unequivocally clear that a key priority for tax reform is to cut taxes for America’s hardworking middle-class families.”
But Trump’s chief economic advisor, Gary Cohn, said Thursday that the president is not rethinking his position on the state and local tax deduction, which allows households to deduct state and local taxes on their federal returns. Cohn declined to take other questions. Cohn had previously suggested that the White House was open to negotiation on the issue.
With many – among them Goldman – speculating that Trump’s tax plan may be phased in (if it even passes) amid revenue offset concerns, the so-called SALT deduction has emerged as a key flashpoint in the tax debate, “one that could determine whether Trump has enough votes or will fail again on one of his top legislative priorities.”
This is probably the biggest obstacle they have to overcome to get to 218,” the number of votes needed to pass a tax bill in the House, said Representative Peter King, a Republican who represents Long Island. “Right now, they can’t get there without us.”
As Bloomberg put it, the numbers are daunting for Trump: Roughly two dozen House Republicans are concerned about eliminating the deduction – and he can’t afford to lose many more votes than that in the House.
Predictably, Republican lawmakers from the states that would be most impacted from the SALT deduction are worried and are scheduled to meet Thursday with the House’s chief tax writer, Ways and Means Chairman Kevin Brady, to discuss the issue. Many come from the high-tax states that would be hardest hit, including New York and New Jersey.
King on Wednesday floated the idea of limiting the use of the deduction to people with incomes less than $400,000 — a cap that that has drawn some support, including from New Jersey’s Tom MacArthur. MacArthur was one of the key Republicans who forged a compromise in the House over a bill to repeal Obamacare. That effort ended last month when the Senate failed to vote on its own repeal-and-replace legislation.
MacArthur said he’s taken his concerns to House leaders and the White House “because I think it’s important that everyone involved understands — you can’t gloss over this, this is a big issue, and we can’t do tax reform on the backs of six or seven states. It’s just not fair.”
House Speaker Paul Ryan defended the repeal of state and local tax deductions at an event in Washington on Thursday, criticizing the break for “propping up profligate big government states.”
“People are going to be better off no matter what state you come from,” Ryan said, citing the tax plan’s call to double the standard deduction and increase the child tax credit.
Trump’s White House first proposed ending the SALT deduction in April, in a one-page outline of the president’s tax goals. Its repeal is estimated to generate about $1.3 trillion over 10 years, making it an important way to help pay for the business and individual tax-rate cuts Trump and congressional leaders propose.
Representative Chris Collins, a New York Republican who’s close to Trump said he thought the president has been more focused on cutting taxes for corporations and pass-through businesses to stimulate the economy. “And he’s left it to others for the details of how we get there” and “how we pay for it,” a confused Collins said.
At the same time, many conservatives argue that the tax break should be abolished because it subsidizes state and local governments that tax their citizens heavily – a view Trump echoed during an interview that Fox News aired Wednesday night. “It is finally time to say, ‘Make sure your politicians do a good job of running your state,”’ he told interviewer Sean Hannity.
Of course, should the SALT provision be amended, absent any additional government revenues, it would greatly increase the federal deficit that would result from Trump’s tax bill – endangering the legislation’s support among some lawmakers or limiting the size and duration of its cuts.
In the White House, Trump’s point-person on tax policy, Shahira Knight, met Wednesday with representatives of groups that want to preserve the tax break, including the National Association of Realtors. But earlier in the day, Kevin Hassett, one of the president’s top economic advisers, said the administration still expects to see a tax bill with permanent rate cuts and no deduction for state and local taxes. The state and local tax deduction primarily benefits high-income people in high-tax states, including New York, New Jersey and California – i.e. largely blue states as shown in the chart above. But about 10 percent of tax filers with incomes less than $50,000 claimed the deduction in 2014, according to the Tax Policy Center, a Washington policy group. People who make more than $100,000 a year accounted for about two-thirds of the SALT deductions claimed that year.
Meanwhile, in its latest assessment of the Trump tax plan, Goldman said that
it seems likely that Congress will phase in the tax cut over time. Congressional Republicans are likely to try to provide some near-term tax benefit to individuals ahead of the midterm election, but the greater emphasis in our view will be to reduce statutory tax rates while keeping the overall cost within the parameters laid out in the pending budget resolution. This would argue for a somewhat backloaded tax cut.”
In any case, judging by the market, and specifically the ratio of “High tax” corporates to the overall market, as of this moment, the market is once again convinced that Trump’s tax reform is effectively dead.
Top photo | President Donald Trump speaks about tax reform at the Farm Bureau Building at the Indiana State Fairgrounds, Wednesday, Sept. 27, 2017, in Indianapolis. (AP/Alex Brandon)
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