The GOP released its tax reform framework earlier this week, and it punted on, well, most of the difficult political and policy questions of a notoriously arduous process. It left unspecified, for example, how much the child tax credit would increase and did not illuminate how it would prevent wealthy individuals from abusing a lowered “pass through” business tax rate. The framework specified new individual income tax brackets, but didn’t determine the thresholds at which they’d begin. Most importantly, it attempted to keep the lobbying armies of literally every industry at bay by remaining vague on the tax breaks it would eliminate to fund a 15–percentage point reduction in the corporate tax rate.
The more detailed a tax plan gets, the more likely the process derails before it can even get out of committee. We know this because there is one area where the plan gets specific on the elimination of a popular tax break, and the pushback it’s receiving is already threatening to derail the process. I don’t want to say, “for anyone following health care, this will sound familiar,” but for anyone following health care, this will sound familiar.
The plan calls for the elimination of the state and local tax (SALT) deduction enjoyed by millions of middle-class itemizers, especially in high-tax states like New York, New Jersey, California, Illinois, Connecticut, and Maryland. You may recognize that those are among the bluest states in the country, which was probably why the authors of the framework were willing to get specific about the screw job heading that way.
The problem, at least in the House, is that these states do have some Republican members, and many of those Republican members represent suburban, middle-, and upper–middle class constituents with significant state and local income and property tax bills. Republicans represent 26 of the 50 congressional districts with the highest percentage of residents using the SALT deduction—and quite a few of the next 50. That’s enough to kill a party-line tax reform bill.
The deduction is “incredibly important to the people I represent,” New York Rep. Dan Donovan, who represents Staten Island, told me in an interview. For a family making $200,000 in his district, he said, the state and local income deduction is worth about $20,000 and property taxes another $10,000. His district, he noted, was already a “donor community” to the rest of the country in terms of federal taxes collected, and eliminating this deduction would only heighten that disparity.
These Republicans in high-tax states have wasted no time drawing a line against the proposal. Illinois Rep. Peter Roskam, representing the western suburbs of Chicago, has been blunt that “this [proposed elimination] has to be dealt with,” told the Wall Street Journal. “The members with concerns from high-tax states have to be accommodated.”
“I’m going to fight this out and hopefully have success in getting restored,” New Jersey Rep. Tom MacArthur told Politico. “I am going to do what I can to rally states like New Jersey and New York, Pennsylvania, California, Illinois, Connecticut.”
This example is just a minor taste of the Tax Reform Is Hard mantra. The plan was specific on but one of the many difficult trade-offs to come, and within a matter of hours the debate has become about the extent to which the proposal will have to be scaled back. The White House and congressional leadership, Donovan told me, have been open to discussions changing the SALT treatment. Gary Cohn, the White House economic adviser and point man on tax reform, said Friday that changing the elimination of the SALT deduction wouldn’t cross a “red line” for the White House, whereas changes to the proposed corporate rates would.
But the GOP framework didn’t include this provision just as an aside that it could take or leave. Even partially restoring the SALT deduction would eliminate a central way to raise revenue for a framework that’s short on that. The SALT deduction is estimated to be worth about $1.3 trillion in revenue over the 10-year budgeting window, money that’s needed to cover the rate cuts the GOP envisions elsewhere. The SALT deduction elimination isn’t an island, either: It’s deeply connected to other ideas within the framework. Restoring this deduction would hamper both the legislative efforts’ delicate balance sheet and the very idea behind the effort of simplifying the tax code. But if they don’t restore it, they may not have the votes to get through the House.
Even the GOP House members who are pissed about this particular provision are overall pleased with the framework and excited for the possibilities. At the very least, Donovan told me, they’re happy to be talking about something that’s not health care. But it only took about 24 hours after the mostly vague framework was released for a very real (and predictable) existential problem to emerge. We’ll see how happy everyone’s feeling in a few months as the skeleton is fleshed out.