WASHINGTON -- Conservative activists and House Republican leaders want to eliminate a trillion-dollar tax break that's said to mostly benefit wealthy filers in Democratic states, a push that further threatens President Donald Trump's hopes of winning bipartisan support for a tax overhaul.
Ever since the inception of the federal income tax in 1913, taxpayers have been allowed to deduct the state and local income taxes they pay from their taxable income. Anti-tax crusaders, including Grover Norquist, the president of Americans for Tax Reform, say the deduction represents bad policy.
"When you allow people to deduct their state and local taxes against the federal tax, you in effect subsidize tax increases at the state and local level," Norquist said an interview. "The way to solve that is to get rid of the deduction. It's good tax policy. It's good tax reform."
The deduction is a rare tax break for high earners that conservatives want to abolish and Democrats want to protect, a dynamic that scrambles the traditional partisan divide.
"Republicans don't like the idea of subsidizing state and local governments," said Roberton Williams, an economist with the nonpartisan Tax Policy Center. "This is transferring money from low-tax states to high-tax states. So this doesn't rank high on the list of deductions and preferences they like. The flip side of that is Democrats like the idea of states having more funds."
Trump hasn't taken a public position on the issue, and White House spokesman Natalie Strom declined to comment on his thinking. "He's continuing to hear input from all sides" on a potential tax plan, she said, describing it as a high priority.
Ditching the deduction would raise federal tax revenue by $1.3 trillion over 10 years, according to the Tax Policy Center, which found that 90 percent of that increase would be paid by taxpayers who earn $100,000 or more.
The largest beneficiaries of the tax break are California, New York and New Jersey, all relatively high-tax Democratic-leaning states, which eat up more than a third of the nationwide benefits, according to the nonpartisan Committee for a Responsible Federal Budget.
In the five states where residents benefit most, the deduction comprises at least 7 percent of residents' adjusted gross income. For these states, which include Connecticut and Maryland, the average federal adjusted gross income falls between $73,000 and $94,000, with Connecticut having the highest figure, according to data from the Tax Foundation, a national tax policy nonprofit.
Arkansas ranks among the bottom 10 states nationally for income levels. Arkansas' adjusted gross income averages $53,000, with residents using the state and local tax deduction typically seeing their federal taxable income reduced by about 3.7 percent.
In Arkansas, Benton County residents benefited most from the tax break in the 2013 tax year, having deducted on average more than $10,000 from their federal taxable income. Pulaski County followed, with that federal deduction typically falling between $8,000 and $10,000, according to the foundation's figures.
By comparison, California residents with income levels at $74,000 typically claimed federal deductions from state and local tax payments equaling nearly 8 percent of their adjusted gross income in 2013, according to the Tax Foundation.
The Heritage Foundation, a right-leaning research and advocacy group, urged Congress in a recent report to "repeal the deduction and use the revenue gained to reduce federal marginal tax rates."
House Speaker Paul Ryan, R-Wis., has proposed to do just that. The blueprint for tax changes that he introduced last summer -- which has drawn most notice because it proposes a controversial border-adjusted tax -- would kill the deduction.
Yet the intraparty politics surrounding the issue could be tricky. In the House, 28 Republicans represent New York, California and New Jersey combined, and the GOP can afford to lose only about 20 of its own members to pass a bill without Democratic support.
"You're going to see Republican members in those states fighting to keep those deductions," said Rep. Chris Collins, R-N.Y. The state and local tax break is "big for New Jersey, New York, California," he said.
Democratic opposition is assured.
"Any proposal to eliminate or scale back the state and local deduction would result in a significant tax increase on middle-class Americans," said Matt House, a spokesman for Sen. Charles Schumer of New York, the Democratic leader. "Sen. Schumer will vigorously fight this proposal."
The prospect may be moot if Republicans decide not to offset the cost of their tax plan. While Ryan remains committed to a permanent overhaul, which likely would have to be revenue-neutral, several top GOP senators have floated a straight tax cut that would automatically expire after 10 years.
Information for this article was contributed by Sahil Kapur of Bloomberg News; and by Brandon Mulder of the Arkansas Democrat-Gazette.
A Section on 04/20/2017