Elected leaders from both parties are mounting a fight against one likely provision in President Donald Trump’s tax-overhaul plan — the elimination of the 104-year-old deduction for state and local taxes.
Wiping out the prized deduction could reap more than $1 trillion for the federal treasury during the next decade, while furthering Trump’s goal of eliminating “targeted” breaks and simplifying the tax code. But it would burden residents in cities and states that have high property or income tax rates, some of whom could end up paying thousands of extra dollars per year.
The one-page tax plan that the White House released in April doesn’t explicitly call for eliminating the deduction, but Trump’s top economic advisers say it’s on the chopping block. So local and state officials from California to Maine are girding for battle, along with many of their House members and senators. The backlash transcends party lines, a rare occurrence so far in the national tax reform debate.
“I don’t think that will go anywhere,” Republican House Appropriations Chairman Rodney Frelinghuysen said during a telephone town hall in his district in New Jersey, the state with the nation’s highest property taxes. “You’ll find most members of Congress in the Northeast, the high property tax states, will continue to support that deduction.”
But the Trump administration seems determined.
“We don’t think it’s the federal government’s job to be subsidizing states,” Treasury Secretary Steven Mnuchin said at a recent economic conference. “Some states have zero income taxes, some have high income taxes. … For people like me who live in California, you’re going to be stuck with higher taxes that you can’t deduct.”
Lawmakers who oppose the tax break have tried and failed to abolish it before, notably in 1986 when the effort threatened to upend that year’s entire tax reform initiative, the last major overhaul on the books.
Many Democratic state and local officials believe Trump has painted a bull’s-eye on their backs because of their largely blue locales. Beyond raising their constituents’ tax bills, local officials fear that ending the deduction would put pressure on them to slice taxes or cut services.
New York Gov. Andrew Cuomo has called the proposal a “direct attack” by the federal government that would hit blue states harder than others.
“It is not an economic policy, it is political vindictiveness,” Cuomo wrote in the New York Daily News in March. “States that prioritize spending on societal goods are prominently Democratic and this would directly reduce those states’ ability to compete with other states."
But many Republicans share Cuomo’s ire, in New York and elsewhere. Just hours after Trump released his one-page tax blueprint in April, Rep. Leonard Lance (R-N.J.) publicly condemned the potential elimination of the deduction.
“I hope we can preserve this,” Lance said in an interview. “I want a full analysis of how this would affect residents in New Jersey.”
Some Washington lobbyists who work for state and local officials say they are guarding against double taxation of wage income. They call it disingenuous for Trump to turn a blind eye to that principle while fighting to end double taxes on investment income.
Supporters are mobilizing more than just letter-writing campaigns to defend the deduction.
The National Association of Counties is leading efforts to put together a coalition that includes other government groups like the U.S. Conference of Mayors, the National Conference of State Legislatures and some private-sector interests, including the real estate sector. They plan to host an event on Capitol Hill next month to lobby members of Congress and their aides about the deduction, which has existed since the federal income tax was codified in 1913.
Advocates are already pounding on lawmakers’ doors, according to a congressional aide.
“Tax reform is a marathon, not a sprint,” said David Parkhurst, the National Governors Association’s staff director and general counsel. “We’re not late to the party.”
Big money is at stake.
According to IRS data from 2014, New York state residents itemized $20.2 billion of property taxes and $47.3 billion in income taxes. The governor’s budget office estimates that 3.3 million New Yorkers will save $5.2 billion writing off property taxes and $12.1 billion deducting local income taxes this year — meaning their federal income taxes would rise between 20 and 44 percent if the deductions were eliminated.
In New York City, roughly a third of the city’s 4 million taxpayers claim itemized local income tax and property tax deductions on their federal returns, worth a total $32 billion in 2014. Eliminating the deduction could add roughly $8 billion to residents’ federal tax liability each year.
“As a tax principle, we don’t understand it,” said Dean Fuleihan, the head of New York City’s Office of Management and Budget. “We don’t understand the point of taxing the income twice. It doesn’t seem to be consistent with what’s supposed to be the guiding principle of these tax policies.”
Eliminating the deduction could have the biggest impact on those making between $50,000 and $100,000 a year, said George Sweeting of the city’s Independent Budget Office. If tax brackets were to remain as they are now, taxpayers earning between $50,000 and $75,000 a year would probably pay $1,600 more per year in taxes without the deduction, and those earning between $75,000 and $100,000 a year would see a $2,200 increase in their tax bill.
But the Trump administration is also looking to overhaul the current tax brackets, making it difficult to predict the exact impact.
In the neighboring Garden State, eliminating the deduction could be particularly crushing because residents there pay the highest property taxes in the nation. According to the Tax Foundation, four out of 10 residents itemize the state and local tax deduction in New Jersey. Another think tank, the Tax Policy Center, estimated that cutting the provision would increase the average tax bill for a New Jersey resident by more than $3,500 per year.
“Our taxes are already way too high here at the local level and it’s causing us to lose good people,” Rep. Josh Gottheimer (D-N.J.) said in an interview. “We simply can’t afford to eliminate this.”
If a tax change of this magnitude were to go into effect, voters would be likely to press even harder for property tax cuts, said Michael Hayes, assistant professor of public policy at Rutgers University.
“It’s going to put more pressure on state and local governments to try and cut spending and put more limitations on the growth of property taxes,” he said.
New Jersey Gov. Chris Christie, a longtime friend and close adviser to Trump, took a more measured stance on the tax proposal than other state officials. The Republican governor said he wants to see Trump’s plan in its entirety and gauge whether this hike could be offset by reductions in the income tax.
“I am not ready to yet declare that the plan is good or bad for New Jersey,” Christie said at a press event. “I’m concerned about it because we are a higher tax state at the local and state level, but we have to see what offsetting cuts in rates the president makes to help higher per-capita-income states like ours.”
California Senate President Pro Tem Kevin de León, a Democrat, said taxpayers could benefit from elements of Trump’s tax proposal, including increasing the standard deduction and eliminating the estate tax. But he added: “Everyone knows President Trump loves double talk, but apparently he likes double taxation too."
It’s not just populous states that could be hit. Sen. Susan Collins (R-Maine) said she has concerns about the potential impact in her high-tax state.
“I would want to see data on that, and whether or not the increase in the standard deduction that I gather the president’s going to propose would be sufficient to offset that,” she said in an interview.
More pointed criticism came from a former governor of the state, Sen. Angus King (I-Maine), who said Trump’s proposal would amount to a “shift and shaft” for Maine.