The House narrowly passed the Senate-passed budget 216 to 212 with few tweaks unlocking the path forward to tax reform. Their decision to avoid a conference committee and vote on the Senate version of the budget was a critical step to accelerating the process. All Democrats and 20 Republicans voted against the budget, including Republican Representatives from high-tax states like New York and New Jersey, who launched a protest vote against Ways and Means (W+M) Chairman Kevin Brady and the Republican leadership after failing to make a deal with them on the elimination of the State and local tax deduction (SALT) as a part of tax reform.
Negotiations were underway until last evening when leadership canceled a meeting declaring there was “no urgency” and signaling that they had the votes to pass the budget without concessions.
The SALT deductions are actually two important and costly provisions in the tax code:
- Deduction for property taxes on real property – The code permits an owner occupant to deduct property taxes paid on that real property
- Deduction for non-business State and local taxes other than on owner-occupied homes – The code allows taxpayers who itemize to claim a deduction for State and local income taxes or, at the taxpayer’s election, State and local sales taxes and property taxes.
According to the Treasury Department, the cost of the deduction for property taxes on owner occupied homes is approximately $485B over 10 years. The estimated cost of the deductions of other State and local taxes is approximately $1T over the same period.
The SALT deduction has emerged as one of the battlegrounds for tax reform. Its early and prominent role owes itself to the way in which tax policy makers – particularly those of the conservative ilk – have viewed it for the last three decades.
Ronald Reagan referred to the state and local tax deduction as “the most sacred of cows.” Reagan tried, and failed to eliminate the deduction as part of the 1986 tax overhaul. In the end, he had to settle for scaling back the deduction for sales taxes which was eventually reinstated.
Policy advisers to President Trump like Stephen Moore at the Heritage Foundation and Dr. Art Laffer have argued for years that the State and local tax deduction masked irresponsible fiscal behavior in high tax States. There is, then, a strong ideological driver to including the SALT deduction in tax reform.
The other reason for SALT’s serious consideration in tax reform is that it represents a significant amount of revenue to the U.S. Treasury. Congress will not be able to seriously consider reductions in the corporate and individual rates if it keeps tossing overboard big ticket tax expenditures like SALT.
The challenge for Congress will be, as it was for Ronald Reagan, overcoming the disproportionate effect the SALT deduction has depending on where you live.
Because eliminating the SALT deduction will be a pretty dramatic change, we would expect some mitigating measures to be considered. For example, Congress could elect to phase-in elimination of the deduction or establish an income threshold above which the deduction would not apply.
Either way, there is no denying elimination of the SALT deduction is very much a possibility for inclusion in the tax reform package to be released by House leadership next week. Whether it survives the legislative process is an open question, of course. Now would probably be a good time to at least give it your consideration.
Next Steps: House Republicans release contents of tax reform bill - next week.
PROPOSED TIMELINE
- November 1st
- Introduction of tax reform bill
- Tax boot camp for conference
- Week of November 6th
- W+M Committee markup of tax reform
- Week of November 13th
- House action on tax reform bill
- Senate Finance Committee markup of tax reform bill
- Week of November 27th or December 4th
- Senate begins debate on tax reform bill
- Week of December 11th
- Senate finishes tax reform bill
- Weeks of December 11th and 18th
- Tax package conference report (to reconcile the different bills)
Call or email us with questions.