Political News

How states that carried Trump to victory avoid one sticky part of the tax bill

Posted December 7, 2017 2:06 p.m. EST

— When the House and Senate passed their respective tax bills, they agreed on one thing: The repeal of state and local tax deductions, except for property taxes. Those are capped at $10,000.

That means that state and local income and sales tax deductions, which make up the bulk of the rest of state and local taxes, would no longer be deductible, while up to $10,000 in property taxes would be. As Congress considers a final bill that can clear both the House and Senate, debates over whether to restore some or all of the state and local tax deductions continue.

As the Tax Foundation has shown, the Rust Belt states that propelled Trump to office have some of the highest property taxes in the country. Wisconsin, Pennsylvania, Michigan and Ohio all rank in the top 10 states with the highest property taxes. The way the Senate and House have structured their tax plans, even if state and local tax (SALT) deductions are repealed, it won't hit these areas as hard as others because people there will still be able to deduct some of the most burdensome of these taxes.

A CNN analysis of swing state IRS data compiled by the liberal-leaning Center on Budget and Policy Priorities drives home how the Senate and House bills pick winners and losers.

CNN found that only six of the 107 Congressional Districts in critical swing states -- Ohio, Michigan, Wisconsin, Pennsylvania, North Carolina, Florida and Virginia -- pay above the national average in state and local income or sales taxes per return. The average district in 2015 deducted $8,207 per return. That's because these states tend to have lower income and sales taxes but higher property taxes. Florida has no state income tax. Four of the six districts paying above the national average were held by Democrats. (Note: The most recent IRS and congressional district data is from the 2014-2016 and district lines have been redrawn since then in Florida, North Carolina and Virginia.)

While some high-income filers in these swing states still take large deductions, these states on average will not be as affected as states that voted against President Donald Trump in the 2016 election, like New Jersey, New York and California.

However, an analysis by the Tax Policy Center has also shown that lower-income filers do take advantage of the SALT deduction. Additionally, in some cases, the loss of the SALT tax deduction could lead some high-income earners to pay more in tax because the alternative minimum tax (AMT) will no longer kick in for them. The Senate tax bill partially keeps the AMT, but the House bill repeals it.

Critics of the tax reform bill say SALT deductions do more than just reduce the tax burden on high earners. States use revenue gained from the state and local taxes to pay for services that support low-income earners. Property taxes are important for local governments but contribute little to the government services of most states, according to a Tax Policy Center analysis. Making state and local sales and income taxes more burdensome might make it harder for states to raise revenue to pay for services that benefit for lower earners, says Michael Leachman at the Center on Budget and Policy Priorities. (Some Southern swing states won't feel the impact of the changes as much as other states).

"There's no question that the deduction is worth more in states with higher incomes and higher income taxes," he said. "That doesn't mean losing the deduction is good for taxpayers in other states."

Those who want to repeal state and local tax deductions say that because they benefit wealthy coastal filers the most, the deductions are regressive. The Tax Foundation calls them "a costly anachronism." The American Enterprise Institute strongly supports repeal, but wrote that a full deduction repeal may be too disruptive to state governments and called for a phase-down to zero over multiple years.

No doubt the fact that state and local taxes tend to be more burdensome to coastal states has made their repeal less difficult. Republican Congress members from New Jersey, New York and California have been the strongest voices among the Republicans against the tax reform bills proposed by their party. Twelve of the thirteen Republican members who voted against the House bill were from these three states. But it was not enough to derail the bill or keep the SALT deduction in the bill.

Sen. John Cornyn, a Texas Republican, told CNBC on Thursday that changes to the state and local income taxes continue to be items of debate as the bills go to conference committee. "I talked to [House Majority Leader Kevin] McCarthy the other night, and he did tell me that this is an item of contention in the House," he said. McCarthy is a representative from northern California.

Eliminating the tax deduction has been the subject of intense political debate for decades now. President Ronald Reagan tried unsuccessfully to repeal the deduction. In end, he gave up, saying it was a "sacred cow." It has been on the books, after all, for 100 years.