WASHINGTON – The federal deduction for state and local taxes prevents double taxation and shouldn’t be targeted for elimination as if it were a tax loophole, members of a broad coalition said in a conference call on Thursday.
The coalition, Americans Against Double Taxation, successfully fought to retain the SALT deduction during the last tax reform debate in the 1980s and is gearing up to do that again, Bob Chlopak, director of the group and a partner at CLS Strategies, told reporters in a conference call.
State and local government groups, school board associations and real estate industry representatives have joined in the effort to mobilize as congressional Republicans and the White House prepare to announce the framework of their tax reform plan next week.
“We are mobilizing because tax reform is real and the House Republican leadership has indicated that next week they plan to release some sort of plan,’’ said Matt Chase, executive director of the National Association of Counties. “We’re still not clear if it will be full legislative text or more principles.’’
The coalition sees the SALT deduction as a prime target because of its large potential value in offsetting the cost of tax cuts and its inclusion in an earlier outline released by House Republicans.
The congressional Joint Committee on Taxation in January estimated the value of SALT at $69.3 billion in fiscal 2017 and at $368.8 billion over the five fiscal years from 2016 through 2020.
“We are told that when you look at the offset list we appear to be the weakest link,’’ Chase said.
Little Rock, Ark. Mayor Mark Stodola, who is first vice president of the National League of Cities, said the coalition intends to be “one of the strongest links’’ in the debate over tax reform.
“Simplification of the tax code is important and there are other ways for that to be tackled,’’ he said.
Stodola quoted from a report issued over the summer by the Government Finance Officers Association that estimates 40% of taxpayers with an income of between $50,000 and $75,000 claim the SALT deduction. That report also estimated that more than 70% of taxpayers earning from $100,000 to $200,000 per year itemize on their federal tax returns and use the SALT deduction.
Home values could drop more than 10% if the SALT deduction is eliminated, said Evan Liddiard, senior policy representative for federal taxation at the National Association of Realtors.
“This could immediately dunk millions of homeowners under water on their mortgage, leaving them owing more than their homes are worth,” Liddiard said.
SALT includes real property taxes and NAR says that if the SALT deduction were eliminated or limited, the costs of home ownership would rise.
A drop in home values would directly affect local tax revenues collected by school districts, said Thomas Gentzel, the executive director and CEO of the National School Boards Association.
U.S. House Speaker Paul Ryan, R-Wis., has said Republicans plan to significantly increase the standard deduction to offset an elimination of SALT, if it’s part of tax reform.
The GFOA report said even if the standard deduction were to double or triple, a significant portion of taxpayers would still end up with tax increases.
The average SALT deduction is highest in Connecticut ($7,774), followed by New York ($7,182), New Jersey ($7,045), the District of Columbia ($6,056) and Maryland ($5,604), according to the GFOA report.
The smallest average SALT deduction is claimed in South Dakota ($982), with Alaska ($1,023), North Carolina ($1,043), North Dakota ($1,211) and Wyoming ($1,244) close behind.
A report issued in May by the nonpartisan Congressional Research Service found that generally “if state and local tax deductibility were eliminated, the federal tax burden would shift from all federal taxpayers toward itemizers.’’
CRS also said, “Itemizers tend to be higher income, thus, federal income taxes may become more progressive if the deduction for state and local taxes were eliminated. Estimates suggest that after-tax income for upper-income individuals could decrease by an estimated 2.9% with the elimination of state and local tax deductions, while lower-income individuals would see no change in their after-tax income.”