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Compromise on state, local tax break draws praise, caution from N.J., Pa. Republicans

A plan floated by GOP House leaders would keep the federal deduction for property taxes - but eliminate the write-off for state and local income taxes. It would also include some limits on the property tax break, most likely a cap on how much can be deducted. The change moved Rep. Tom MacArthur, of South Jersey, closer to supporting the GOP's planned tax overhaul. Others from the Philadelphia area awaited further details.

Rep. Tom MacArthur, R-N.J. speaks with reporters on Capitol Hill in Washington in May. (AP Photo/Cliff Owen, File)
Rep. Tom MacArthur, R-N.J. speaks with reporters on Capitol Hill in Washington in May. (AP Photo/Cliff Owen, File)Read moreCliff Owen

WASHINGTON — A plan that would preserve part of the popular tax deduction for state and local taxes — but scale it back — drew praise Wednesday from Rep. Tom MacArthur, a South Jersey Republican, signaling potentially critical support for a compromise that could advance the GOP plan to cut corporate and personal income taxes.

The proposal, floated by GOP House leaders, would keep the deduction, but eliminate the related write-off for state and local income taxes. It would also include some limits on the property tax break, most likely a cap on how much can be deducted, MacArthur said.

At stake is a deduction that now saves many in New Jersey and Southeast Pennsylvania thousands of dollars a year on their federal tax bills. Reaching a deal on scaling back the break — to pay for other tax cuts — would be a key step for President Trump and Republican leaders, who face potential GOP defections from New Jersey and New York lawmakers whose residents rely heavily on the deduction.

"This is now moving in a direction that is far better than a week ago," MacArthur said Wednesday morning. He stopped short of fully endorsing the overall tax bill, but sounded more positive about possibly backing a measure even if it still rolls back a deduction that benefits many in New Jersey and Pennsylvania.

Republican leaders had planned to eliminate the deduction, which helps New Jerseyans who claim it cut an average of almost $18,000 off their taxable income, according to the latest IRS data. In Pennsylvania the average claimant knocks off more than $11,000 in taxable income — with higher amounts in the four counties surrounding Philadelphia.

People who use the deduction may still lose a significant portion of it.

For example, in Burlington County, which MacArthur represents, income tax payments accounted for roughly 46 percent of the amounts written off under the state and local deduction in 2015, IRS data show. Property taxes accounted for 52 percent of the benefits. Sales and other taxes made up the rest of the deduction.

"When you consider a massive tax increase on the middle class a win, we've got problems," said a statement from Rep. Bill Pascrell (D., N.J.), who sits on the tax-writing Ways and Means Committee. He said the deduction must be restored in its entirety. "By picking and choosing which local and state taxes get preferences, the majority bill could actually lead to an increase in property taxes."

Other Republicans from the Philadelphia area praised the potential compromise but were cautious as they await the final details.

"Until I see the full package, I am not going to commit one way or another on anything," said Rep. Ryan Costello of Chester County. "Every day you push one way, and then something else comes out on the other side."

GOP leaders had planned to unveil their bill Wednesday, but pushed the proposal back to Thursday as they try to work out more compromises. Many Republicans see an existential imperative to pass a tax overhaul, worrying that if they fail they'll have nothing to show their voters when midterm elections come next year.

Rep. Patrick Meehan, a Delaware County Republican who sits on the House tax-writing committee, said he discussed the state and local deduction with the panel's chair, Rep. Kevin Brady (R., Texas).

"I've long been advocating for an accommodation on this issue, and I'm pleased to see that the concerns I voiced to Chairman Brady were taken into consideration," Meehan said in a statement, but he added that he wanted to see the details in the final bill.

Rep. Frank LoBiondo (R., N.J.) has also voiced serious concerns about eliminating the deduction.

By preserving the break in part, MacArthur argued, New Jerseyans will still be able to write off their property tax bills, which can rise even for people on a fixed income, such as retirees. But he said it remains unclear how much property tax will be allowed to be deducted.

"It's not where it needs to be yet," MacArthur said. "I want to get where the vast majority of homeowners can deduct all of their property tax."

The typical New Jerseyan who used the property tax break in 2015 deducted about $9,500. The average was lower in Pennsylvania.

MacArthur argued that with lower rates, an expanded standard deduction and other breaks, the vast majority of New Jerseyans will see an overall tax cut. And he said most people won't need the state and local tax deduction because they will use the larger standard deduction instead. (Filers can use either the standard deduction or itemize and use other deductions.)

Critics, however, say other provisions — such as eliminating personal exemptions for filers and their dependent children — will reduce the promised benefits.

And New Jerseyans who lose the ability to deduct their relatively high income taxes might receive a much smaller tax cut than people in other states, who stand to receive the benefits of the tax plan without shouldering as many of the trade-offs.

MacArthur had previously argued that New Jerseyans shouldn't pay for tax cuts for the rest of the country.

"If the vast majority of people in New Jersey get a tax cut and the wealthiest in New Jersey end up paying a bit more, I won't completely shut that down. I want to see how it affects most people," he said Wednesday.

The state and local deduction is targeted in large part because of its size: it is worth around $1.3 trillion over 10 years. It also largely flows to a handful of mostly Democratic states, including New Jersey, New York, and California. Conservative critics say it rewards states that raise taxes.

Sen. Bob Casey (D., Pa.) and Gov. Wolf blasted the plan to eliminate the deduction in a call with reporters this week. Casey said 52 percent of Pennsylvania taxpayers who used the state and local deduction made less than $100,000. (Wealthier people claim the lion's share of the deduction, federal data show.)

"We believe that eliminating or curbing the state and local tax deduction is just one of many examples of how this Washington Republican tax scheme will harm middle-class families," Casey said.