Tax reform feud erupts

First GOP tax reform feud erupts over state, local tax break

Republicans from New Jersey, New York, California and Illinois are among those worried that voters in their districts will face higher taxes than they currently do.

By AARON LORENZO and RACHAEL BADE

Vulnerable Republicans from a handful of purple districts have declared war on a central pillar of the tax plan released Wednesday by President Donald Trump and GOP leaders in Congress: A provision that would eliminate state and local tax deductibility, which they say would hike taxes on their middle-class constituents.

In the first intraparty showdown to emerge after the plan's unveiling, Republicans from New Jersey, New York, California and Illinois are among those worried that voters in their districts will face higher taxes than they currently do. They've already started making their case to Speaker Paul Ryan (R-Wis.) and Ways and Means Chairman Kevin Brady (R-Texas) — both advocates of ending the deduction — and are vowing to organize to restore their tax benefit.

"I’m going to fight this out and hopefully have success in getting this restored,” said New Jersey Republican Tom MacArthur, a leader of the effort. "I am going to do what I can to rally states like New Jersey and New York, Pennsylvania, California, Illinois, Connecticut.”

Their campaign throws a curveball into tax reform and is already having an effect: Senate Finance Chairman Orrin Hatch (R-Utah) went off script Thursday and said he’d like to maintain the tax deduction if possible. That undercuts the united front GOP leaders wanted to show on the matter — and potentially leaves them a $1 trillion hole in their list of pay-fors, potentially jeopardizing their entire plan.

“If we can keep it, I'd like to keep it," Hatch said, acknowledging that the position puts him at odds with the statement issued by the so-called Big Six negotiators, a group that includes Hatch.

He called the unified framework "just the beginning" for efforts to overhaul the tax code.

The tax break is important to taxpayers in states and cities with high property taxes and other levies, most of which vote blue though some are represented by GOP lawmakers like MacArthur. Realtors and others in the housing business also see the tax break as a boost for their industry, given its benefit to home buyers.

Republicans from those states worry about taxes increasing on constituents when they can no longer deduct local levies. Asked if he was a “no” on the tax framework, for instance, MacArthur responded: “I’m certainly a loud objector.”

“It’s not fair to give the entire country a tax break on the backs of the citizens of these six or seven states … the highest-tax states in the country, who by the way get the least back as a percentage of what we pay” to the federal government, he said.

The tax benefit provided $338 billion in deductions in 2015, making it the most widely claimed itemized deduction that year, according to the most recently available IRS statistics. Fully repealing it would raise $1.4 trillion in revenue over a decade, according to an estimate by Alex Brill of the conservative-leaning American Enterprise Institute.

MacArthur has been pressing Ryan and Brady on the issue for weeks and also met with Treasury Secretary Steven Mnuchin and White House economic adviser Gary Cohn, who are also insistent about ending the break, saying it mainly benefits upper-income taxpayers.

He’s also coordinating with other GOP House members whose constituents face the same concerns, so they can make a concerted case. Some raised concerns about the provision during a half-day House GOP tax retreat on Wednesday as the plan was getting rolled out.

Ways and Means Republicans know the battle isn't over yet, regardless of whether they agree with Ryan and Brady's position that low-tax states shouldn't subsidize high-tax states, a feeling that reverberates even among some Republicans from places like New York.

“I say it’s incumbent on our governor to reduce his budget from $160 billion to $100 billion,” Rep. Chris Collins (R-N.Y.) said of New York Governor Andrew Cuomo. “I think it’s incumbent on our governor to stop jamming the county taxpayers with the Medicaid costs that equate to 90 percent of the Erie County tax bill.”

But Cuomo told reporters on Long Island that the state's congressional delegation needs to oppose the emerging Republican tax plan.

"I'm saying to our congressional representatives: You do whatever you have to do to stop this," Cuomo said. "I don't care if you have to filibuster. I don't care if you have to lay across the Senate floor and force them to remove you, bodily, from the chamber. This cannot happen. It would be devastating to the people of the state of New York."

Rep. Pete King (R-N.Y.) heard the message loud and clear. During the open mic session at the House Republican tax retreat Wednesday, he warned his colleagues that he could face a backlash at the ballot box should they eliminate the deduction.

King’s centrist Republican district voted for former President Barack Obama twice by 5 points, he told the room. And while Trump won his district last election, it’s only about 35 percent Republican, he said in a brief interview.

“The average person in my district — or the average one who voted for Trump ... their only asset is their home, and they’re paying $15,000 in property taxes on average. Probably another $10,000 in [others],” he said.

GOP leaders responded to King at the retreat by asking him to “keep an open mind.” And so far, some are: One Republican leadership source noted that no lawmakers have drawn a line in the sand over the matter — at least not yet.

In the meantime, Republican tax-writers are hoping to convince concerned members that they shouldn’t publicly bash the framework just because they want to save the deduction. They’re also pointing to their plan to double the standard deduction, which they argue would offset any hit to high-tax state constituents.

“I’m listening, I want to understand better,” said Rep. Charlie Dent (R-Pa.), who acknowledged that although his state wouldn’t feel as much impact as neighboring New York and New Jersey, there’s uncertainty nonetheless. “I want to understand how the standard deduction being doubled will mitigate any changes potentially to the state and local property tax deduction.”

But some GOP leaders are going on the offensive to try to discredit the state and local deduction. On Fox Business Thursday morning, for instance, House Majority Leader Kevin McCarthy, who is from high-tax California himself, suggested the deduction actually serves as an incentive for states to ramp up taxes — because they know the federal government will “subsidize” hikes by allowing people to write them off their federal tax bills.

“Is it fair that other states subsidize states that have high state taxes?” he asked. “Look at California. California is one of the most mismanaged, highest-tax states in the nation. And they use an argument inside that [state] Capitol, ‘Let's raise taxes, as you can write it off on your federal income tax.’”

It’s unclear if such arguments will actually convince any opponents of ending the deduction, however. While Rep. Leonard Lance (R-N.J.), who also stood up to voice his objections during the House GOP retreat, wouldn't commit to voting "no," he said he’s working in tandem with the others to keep pressing.

"This is a matter of grave importance to me," Lance said in an interview, labeling it a fairness issue since Garden Staters already pay more in federal taxes than they receive in federal tax benefits.

MacArthur has floated one alternative to create a single homeowner deduction that would let taxpayers pair their property taxes with interest they pay on their mortgages. New Jersey has higher property taxes than any other state.

Another option, from Rep. Tom Reed (R-N.Y.), would turn the existing federal deduction for taxes paid at the state and local levels into a credit. Reed, who sits on Ways and Means, said he's making his voice heard but is also keeping an open mind.

Brady said Republican leaders "are going to continue to listen to Congressman MacArthur and others from the high-tax states. And secondly, it’s crucial that we deliver tax relief for every American regardless of where they live, including those states that have high state and local taxes. So that’s where we’re going to focus.”

But outside groups representing real estate interests, as well as state and municipal governments, aren't waiting. They're already taking up the fight under a single coalition called Americans Against Double Taxation.

The consequence of losing the benefit, they say, would not only hit housing, but also cut into spending on infrastructure, education, public safety and emergency services, and other civic amenities if states and cities are pressured to cut their own taxes as a result of the deduction’s elimination.

“We better do more than just write letters,” said Tom Cochran of the U.S. Conference of Mayors, one of the groups in the coalition. “Calls are being made right now and the pressure will come from the hinterlands across this nation.”