WASHINGTON – Republicans straining to find about $1 trillion to finance sweeping tax cuts are homing in on two popular deductions that are woven into the nation’s fiscal fabric – the mortgage interest deduction that millions of homeowners prize and the deduction for state and local taxes popular in Democratic strongholds.
About 30 million Americans, or about 20 percent of taxpayers, deduct mortgage interest from their income taxes, a deduction Realtors and homebuilders argue is a catalyst to home ownership in the United States. According to the most recent IRS tally, nearly 44 million people claim the deduction for state and local taxes in 2014, especially in the high-tax, high-income states of California, New York, New Jersey and Connecticut.
Republicans are determined to overhaul the nation’s tax code after more than three decades, delivering on a top legislative priority for President Donald Trump. Highlighting items that have been modernized since 1986, the last year the tax code was overhauled, Speaker Paul Ryan, R-Wis., made a pitch for reform, saying on Monday, “Just like the rotary phone of the 80s, the American tax code is seriously outdated.”
The two deductions are in the cross-hairs as Republicans look to slash the corporate and individual tax rates, according to congressional aides and strong hints from some lawmakers. The aides spoke on condition of anonymity because they weren’t authorized to speak publicly. The deductions point up how what’s seen by some as a special-deal loophole is embraced by others as a revered middle-class touchstone. That’s a major reason why an overhaul of the tax system – a political imperative for the GOP – is so difficult.
House Republicans are promising to reveal details of their plan next week.
The Trump administration has thrown its weight behind a revamp of the tax system, but Republicans are split on some core issues.
They are divided over whether to add to the nation’s soaring debt with tax cuts. In the Senate, Orrin Hatch, R-Utah, who heads the tax-writing Finance Committee, says his panel won’t be “a rubber stamp” for the House Republicans’ plan. The GOP is at odds over eliminating the deduction for state and local taxes.
There are plenty of GOP lawmakers in Democratic-controlled New York, Connecticut, New Jersey and California, and they’re pushing back. A coalition of 70 lawmakers from blue states – including 20 Republicans – lodged their objection formally to Treasury Secretary Steven Mnuchin.
Repealing the state-local deduction for federal income taxes would subject people to being taxed twice, they say.
Some prominent Republicans come from those four blue states – like House Majority Leader Kevin McCarthy of California, Rep. Rodney Frelinghuysen of New Jersey, who heads the powerful House Appropriations Committee, and Rep. Barbara Comstock of Virginia, a second-term lawmaker in a competitive district outside Washington.
Rep. Leonard Lance, a New Jersey Republican, is a leader of the coalition. His suburban district has a median household income around $106,000. “If we’re going to discuss subsidies, we should discuss subsidies across the board,” he said in a telephone interview.
The administration wants the state and local deduction to be eliminated or reduced because, officials say, the federal government shouldn’t be subsidizing states and wealthy households.
The federal deduction for state and local taxes along with the mortgage interest deduction cost the government dearly in lost potential revenue. The state and local benefit, one of the biggest, deprives federal coffers of an estimated $1.3 trillion to $2 trillion over 10 years.
Governors and mayors, as well as big companies that pay state and local property taxes, could coalesce into a potent lobbying force defending the deduction.
The same knock is made by critics against the mortgage interest deduction: that it favors wealthy taxpayers at the expense of people of modest means. The benefit allows homeowners to deduct interest on up to $1 million in mortgage debt. Only about 20 percent of taxpayers deduct mortgage interest from their income taxes. It’s open only to those who itemize deductions, and those taxpayers tend to have higher incomes.
The mortgage interest deduction, costing about $700 billion over a decade, is held up as a booster of homeownership and economic advancement.
The administration and House Republicans diverge on some core issues. Although the administration hasn’t provided specifics on its plan, the Republicans have embraced an approach that would lower the top individual tax rate from 39.6 percent to 33 percent, which would strongly benefit the wealthiest Americans. Trump, meanwhile, insists that taxes on the wealthy would not go down under the plan and might even go up.
Trump has said publicly that he hoped to lower the top tax rate for corporations from 35 percent to 15 percent – a level that Ryan has ruled out as impractically low. There are signs, though, that Trump may be backing down from that position, according to people with knowledge of his recent private conversations with senators.
Some lawmakers are pointing toward economic growth and job expansion, to be achieved with lower tax rates and a doubled standard deduction, as a more efficient way to stimulate homebuying than an individual deduction.
“I think everything should be on the table. … The more we can diminish the individual deductions and loopholes, the more we can have a positive impact on economic growth,” said Sen. Pat Toomey, R-Pa., a member of the Finance Committee.
Ryan, noting the $1 million cap on the mortgage interest deduction, has said, “We could change that limit – I suppose.”
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