Tax reform legislation—and with it, the deduction of state and local taxes on federal tax forms—took another step forward last week, when the U.S. House of Representatives Ways and Means Committee approved, along party lines, a bill that would eliminate the state and local tax deduction, but keep deductions on property taxes.
The same day, the U.S. Senate’s Republican Party caucus unveiled their own tax reform bill. That legislation would eliminate not only the state and local tax deduction, but also the property tax deduction.
The deduction, dubbed “SALT” (state and local tax) has been at the center of the tax debate, as lawmakers search for revenue to pay for tax cuts. Congressional negotiators estimate that eliminating the deduction would save more than $1 trillion dollars.
Lawmakers from Long Island have fought back against the deduction all throughout the ongoing process. Long Island is represented by two Republicans (Peter King and Lee Zeldin) and two Democrats (Thomas R. Suozzi and Kathleen Rice). King and Zeldin are among the handful of Republicans against the bill. King and Suozzi co-authored an op-ed essay opposing the deduction, claiming that its elimination would cost Long Island taxpayers “up to $2.5 billion” per year, while adding that New York remains is the largest net donor to the federal government, sending $48 billion more to Washington than it receives from the capitol city, a number that “helps subsidize other states through federal programs.”
“No one should be taxed again on money you have already been taxed on at the state level,” King said in a recent statement. “These tax deductions…have ensured the taxpayer would not be burdened by a double tax…taking away these deductions would be crippling to [homeowners] on Long Island…nothing should ever be done to make home ownership more difficult in an already extremely expensive market.”
Zeldin also opposes the bill, but he admonished state and local elected officials for making New York “such a high tax state,” while asking them to “do their part to reduce the tax burden from their end as well, because it is out of control…Our state and local tax deduction with the feds is so high, because our state and local taxes are so high…The last piece of this effort to get this win over the finish line is this important negotiation for major changes to that proposal to eliminate SALT. Americans work hard for their money and I believe very strongly that they should keep more of it to save or spend on whatever their heart’s desire.”
House Speaker Paul Ryan (R-WI) supports the deduction. Speaking at a forum last month at The Heritage Foundation, a conservative think tank, Ryan said the deduction only benefits “big government states,” whose lawmakers, he claimed, see the deduction as a way to keep taxes high since taxpayers will be able to use the write-off. The speaker, who represents a rural district in western Wisconsin claimed that “states that actually got their act together pay for states that didn’t.”
The deduction has been in place sine 1913, the same year the federal income tax was first enacted into law. For the past century, it has survived attempts to eliminate it, most recently 30 years ago, when then-President Ronald Reagan introduced his own tax reform plan.
This year, both the House and Senate versions of tax reform reduce the corporate tax rate from 35 to 20 percent. However, the Senate bill would delay the corporate tax cut by one year. The House bill reduces the tax brackets from seven to four with deduction percents at 12 (single filers starting at $12,000 up to $45,000. For married joint filers, this applies after the $24,000 deduction up to $90,000), 25 ($45,000 for single filers and $90,000 for joint filers who are married) 35 (Single filers reach this bracket at $200,000. This rate applies to married filers at $260,000) and 39.6 percent ($500,000 for singles and $1 million for married couples).
The Senate bill keeps the seven brackets and rearranges their rates to 10 percent, 12 percent, 22.5 percent, 25 percent, 32.5 percent, 35 percent, with a top rate of 38.5 percent.