Conservative activists and House Republican leaders want to eliminate a trillion-dollar tax break that mostly benefits wealthy filers in Democratic states, a push that could further imperil President Donald Trump’s hopes of winning bipartisan support for a tax overhaul.
Ever since the inception of the federal income tax in 1913, taxpayers have been allowed to deduct the state and local income taxes they pay from their taxable income. Anti-tax crusaders, including Grover Norquist, the president of Americans for Tax Reform, say the deduction represents bad policy.
“When you allow people to deduct their state and local taxes against the federal tax, you in effect subsidize tax increases at the state and local level,” Norquist said an interview. “The way to solve that is to get rid of the deduction. It’s good tax policy. It’s good tax reform.”
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The deduction is a rare tax break for high earners that conservatives want to abolish and Democrats want to protect, a dynamic that scrambles the traditional partisan divide.
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“Republicans don’t like the idea of subsidizing state and local governments,” said Roberton Williams, an economist with the nonpartisan Tax Policy Center. “This is transferring money from low-tax states to high-tax states. So this doesn’t rank high on the list of deductions and preferences they like. The flipside of that is Democrats like the idea of states having more funds.”
Trump hasn’t taken a public position on the issue, and White House spokeswoman Natalie Strom declined to comment on his thinking. “He’s continuing to hear input from all sides” on a potential tax plan, she said, describing it as a high priority.
Williams said the president, a wealthy New Yorker, has “almost certainly” benefited from the tax break in the past; Strom also declined to comment on that.
Ditching the deduction would raise federal tax revenue by $1.3 trillion over 10 years, according to the Tax Policy Center, which found that 90 percent of that increase would be paid by taxpayers who earn $100,000 or more.
The largest beneficiaries of the tax break are California, New York and New Jersey, all relatively high-tax blue states, which eat up more than a third of the nationwide benefits, according to the nonpartisan Committee for a Responsible Federal Budget.
“Blue state, red state, it doesn’t matter to us. It’s still bad policy,” said Andy Roth, a lobbyist for Club for Growth, a conservative pressure group. “The state and local tax deduction is just a subsidy for government to tax and spend more money.” The Heritage Foundation, a right-leaning research and advocacy group, urged Congress in a recent report to “repeal the deduction and use the revenue gained to reduce federal marginal tax rates.”