Capitol Alert

Trump’s tax overhaul could hurt many Californians

The tagline for Republicans’ new tax code rewrite, unveiled Wednesday at the Capitol, should be “hashtag keep yo money,” South Carolina Sen. Tim Scott joked.

It may not work out that way for millions of California taxpayers, however.

Working in concert with President Donald Trump and his administration, Republican lawmakers pitched a tax “framework” that would dramatically simplify the tax code and slash corporate and income tax rates, all pillars of Republican orthodoxy. To pay for the across-the-board cuts, Republicans want to ax numerous federal income tax deductions – including some that disproportionately benefit residents of California and other high-tax, high-income states.

Many of the details still need to be hashed out by members of Congress, who are hoping to introduce corresponding legislation later this year. That’s an ambitious target, and many in Washington are deeply skeptical that Republicans’ many factions can agree on such a contentious issue. If they succeed in enacting their proposal, it would amount to the biggest change to the country’s tax system in more than three decades.

The biggest deduction on the chopping block is the state and local tax deduction, which enables Californians to subtract those tax payments from their income before calculating how much they owe the IRS. In 2015, federal data shows that more than 6 million people in the Golden State claimed the deduction, worth $112.5 billion. That’s more than any other state, according to the Tax Foundation, a right-of-center tax policy research organization. California is one of just six states, along with New York, New Jersey, Illinois, Texas and Pennsylvania, that together claimed more than half of all state and local tax deduction dollars in 2014, the foundation says.

The Republican proposal doesn’t explicitly say that it will get rid of the state and local deduction. The policy outline released Wednesday, titled “A Unified Framework for Fixing Our Broken Tax Code,” promises only to eliminate “most itemized deductions,” with the exception of the home mortgage interest and charitable deductions. But Congressman Kevin Brady, the chairman of the tax writing House Ways and Means Committee, confirmed that the plan is to eliminate the state and local deduction, among others.

It will be hard for Republicans to pay for all the tax cuts they’re promising unless they follow through on that plan. Ending the state and local deduction would save the federal government $1.8 trillion over a decade, says Nicole Kaeding, a Tax Foundation economist. “If you take away the mortgage interest and the charitable deductions … this is one of the biggest pay-fors on the list,” Kaeding adds.

Lawmakers tried to eliminate the state and local tax deduction in 1986 – the last time the tax code underwent a major rewrite – but dropped the idea amid intense pushback from New York politicians and businessmen. The provision could face similar opposition from Republicans from high-tax states this time around, as well.

House Majority Leader Kevin McCarthy, of Bakersfield, voiced general support for the tax overhaul outline on Wednesday, saying in a statement that it “answers the call from the American people for a fairer and simpler tax code that will create jobs.” Several other California Republicans who The Bee reached out to declined to comment or did not respond. A handful of New York Republicans, however, have made clear to the White House that they won’t vote for a tax plan that axes the state and local tax deduction.

Brady said Wednesday afternoon he hoped to win over colleagues and who are worried about the financial impact on their constituents. He and other Republicans argued their plan’s proposal for fewer tax brackets, lower rates, and a larger standard deduction would lower most Americans’ taxes and lead fewer taxpayers to itemize their deductions. But until Republicans offer more details, including who falls in which tax bracket, it’s hard to evaluate how it will ultimately balance out for California taxpayers.

Trump, for his part, argued in a speech in Indianapolis that itemized deductions like those for state and local taxes “primarily benefit the wealthiest taxpayers.”

Kaeding says that’s generally true. “What you find is about 90 percent of this deduction flows to individuals with excess of $100,000 in income,” she says, or the top 20 percent of American earners. That still touches many upper-middle class households, something critics are already emphasizing.

Democrats, who dominate all but one of the six states that benefit most from the deduction, are uniformly opposed. Not only could eliminating the deduction hurt blue state voters, it could also increase pressure to reduce state and municipal taxes, leading to local budget cuts.

Ending the state and local tax deduction is “a nonstarter,” Rep. Mike Thompson of St. Helena said. A senior member of the Ways and Means Committee, Thompson attended a bipartisan meeting on tax reform at the White House on Tuesday. He welcomed the president’s pledge to work with both parties on tax reform, but said Republicans would have to move away from many of their initial proposals to win Democratic support. The framework, along with tax principles Democrats have laid out this year, are just the starting point.

“That’s going to be the position from which we negotiate,” Thompson said.

Emily Cadei: 202-383-6153, @emilycadei

Related stories from Sacramento Bee