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State and local tax deduction fight poses dilemma for Philly area Republicans

Pennsylvania and New Jersey are among the biggest beneficiaries of the deduction for state and local taxes, which would be axed under the GOP plan. The tax break can save people in Philadelphia's suburbs thousands of dollars a year on their federal taxes.

Internal Revenue Service headquarters in Washington. inates the deduction for state and local taxes. (AP Photo/J. David Ake, File)
Internal Revenue Service headquarters in Washington. inates the deduction for state and local taxes. (AP Photo/J. David Ake, File)Read moreJ. David Ake

WASHINGTON — The tax overhaul rolled out last week by President Trump and congressional Republicans would cost New Jersey and Pennsylvania residents a tax break that can save them thousands of dollars a year — and the idea is already shaping up as a major political threat to the GOP's top agenda item.

The two states are among the biggest beneficiaries of the deduction for state and local taxes, which would be axed under the GOP plan, putting Republicans from the Philadelphia region in an awkward position as the proposal begins its arduous path through Congress.

"That's going to be a tough issue, both with regard to the substance of it itself and the politics," said Rep. Pat Meehan (R., Pa.), who sits on the House committee that writes tax policy.

The provision, which lets people write off many taxes they paid to their state and local governments, generally helps wealthier people with big tax bills and provides significant relief to many in the Philadelphia suburbs.

In Meehan's home turf, Delaware County, roughly 40 percent of filers claimed the deduction on their 2015 taxes, letting them shield an average of $13,428 of income from federal taxes. For someone in the 33 percent tax bracket, that could mean saving more than $4,000.

New Jerseyans, who have the country's highest property-tax bills, claim the third most state and local deductions of any state — helping those who use it to write off an average of nearly $18,000. Pennsylvanians are sixth, with some the biggest savings seen in Bucks, Chester, Delaware, and Montgomery Counties — all represented, at least in part, by Republicans. South Jersey's Burlington and Gloucester Counties also see hefty write-offs and have GOP members of Congress.

"I predict that's going to be a downfall of this plan," said the Democrats' leader in the Senate, Chuck Schumer, of New York. "There are 40 or 50 Republican congressmen from well-to-do suburban districts in high-tax states — New York, California, New Jersey, Pennsylvania, Illinois, Maryland — whose constituents will be clobbered by removing state and local deductibility. Clobbered."

Consider a Burlington County couple. While Republicans would lower their rates and nearly double their standard deduction to $24,000, many in the county already deduct more than that, IRS statistics show, thanks in large part to state and local tax breaks that let them write off an average of nearly $14,000. Even if their overall taxes do drop, losing that deduction means they might not save very much, experts said.

Rep. Frank LoBiondo, a Republican from the Atlantic City area, called the idea "a problem" for him, echoing many others in the region.

But none drew firm red lines, and stalling the plan would carry major risks for local lawmakers, who support tax reform overall. After striking out on repealing the Affordable Care Act, Trump and fellow Republicans are desperate for a big win.

What is the deduction?
At stake is one of the biggest tax breaks on the books — valued at $1.8 trillion over the next decade, according to Jared Walczak, of the nonpartisan Tax Foundation.

That makes it a ripe target for Republicans who want to eliminate most itemized deductions to help pay for boosting the standard deduction and lowering individual and business tax rates.

Critics argue that the state and local write-off disproportionately helps a small group of well-off taxpayers, forcing those in low-tax states — who don't reap nearly as much benefit — to subsidize the deduction.

Only 28 percent of tax filers nationwide use it, according to the Tax Foundation, and close to 90 percent of the benefits go to those with incomes over $100,000. More than half of the value goes to just six states.

Why Republicans have targeted it
The deduction is likely to be a key part of a fierce battle as businesses and regions with competing interests try to shape the final plan.

Gary Cohn, Trump's chief economic adviser, called the deduction a loophole for the wealthy, and showed no signs of relenting.

"You're going to pay a lower rate, but you're going to pay it on more income," he said. "That is a basic core premise of our plan and we're committed to it and we're sticking with it."

Sen. Pat Toomey (R., Pa.), a leading GOP voice on fiscal issues, also backed the idea in the name of paying for the broader package.

"We've definitely identified the items that can get us there. The question is: Will we have the political will to do it?" Toomey said. "I certainly hope we will because it is a good trade-off to reduce some of the special provisions and distortions" in exchange for lower rates that he believes will drive economic growth.

He said nearly everyone, including people who use the state and local tax break, will enjoy "a net savings" once the entire plan is laid out.

Sen. Bob Casey (D., Pa.) disputed that math, though, citing the bevy of lost deductions.

For now it's impossible to precisely predict taxpayers' bottom lines, since many critical details of the GOP plan are unresolved, including who falls into which tax brackets.

But based on the outline, "it's hard to see how this ends up being a big tax cut" for those who rely heavily on the state and local deduction, said Frank Sammartino, a senior fellow at the Tax Policy Center. Tax savings, he said, will be diminished by losing such a significant break, and pale compared with what some others get.

"For sure it's going to be less than for a similar couple or similar person in a state without high taxes," Sammartino said, "and then the question is whether it's really much of a cut at all."

Why keep the deduction?
That's why some New Jersey lawmakers argue the proposal would make their residents foot the bill for everyone else's tax breaks.

They also say their constituents will face what is, in effect, double taxation.

"This proposal crushes New Jersey's middle class," said Rep. Donald Norcross, a Democrat from Camden County.

Rep. Tom MacArthur, a Republican who represents parts of Burlington and Ocean Counties, is pressing to keep the deduction for property taxes, even if that means losing the ability to write off state income taxes.

"There's a clear public policy interest in the federal government encouraging homeownership, within people's means," MacArthur said. "It creates stable, good communities when people are invested in their own homes, and we should encourage that."