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Tax Reform Watch: Trump Wants to End a Big Deduction That Benefits CA and NY

The state and local tax deduction is the seventh-largest deduction in the code, and nearly one-third of the benefit goes to California and New York taxpayers.

Trump in the Oval

President Trump is targeting an end to one of the largest tax deductions in the code, according to reporting from Bloomberg on Wednesday.

The state and local tax deduction, which allows federal taxpayers to write off “income taxes, property taxes, and sales taxes,” is on the chopping block for Trump’s team as it seeks ways to pay for lowering individual and corporate income tax rates.

ON THE BLOCK

So why is Trump targeting the state and local tax deduction?

Advocates for Trump’s plan have sold it in part as a way to shift more taxes onto high-income, high-tax states like California, New York and New Jersey, all of which lean Democratic.

The last major efforts to kill the deduction? Reagan’s tax reform in 1986, and Bush’s tax reform in 2005.

…The state and local tax deduction survived the last major tax overhaul in 1986 when President Ronald Reagan wanted to kill it. Then, an eclectic coalition of corporate executives, lawmakers from wealthy districts, mayors and even public-sector unions joined forces to block its repeal.

KEY FACTS & FIGURES

Who exactly would be impacted by eliminating the deduction? Mostly the top 20 percent of income-earners in the U.S., according to the Congressional Budget Office (image below courtesy of the Committee for a Responsible Federal Budget (CRFB)):

And, according to the Tax Policy Center, more than half of the total deduction benefits high-tax states like California (17.3 percent of benefits), New York (13 percent), New Jersey (6 percent), Illinois (5 percent), Pennsylvania (3.8 percent), and Massachusetts (3.5 percent).

Meanwhile, according to the CRFB, eliminating the deduction would allow Trump and Congress to lower individual income tax rates across the board:

The state and local tax deduction is the seventh largest tax expenditure in the tax code costing the federal government $77 billion of foregone revenue in 2013 according to JCT and CBO and $1.1 trillion over the next ten years. OMB estimates the cost at $64 billion in 2013. Based on CBO’s numbers, this amount of revenue could be sufficient to reduce all individual taxes by about 5 percent (which translates into 2 points for the top rate) or reduce each rate uniformly by about 1.5 points.

This deduction is one to watch as the tax reform debate gets underway.