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In House, California Dreamin’ on Tax Deductions

Tax break for state income taxes are back in negotiations on measure

House Majority Leader Kevin McCarthy and South Dakota Rep. Kristi Noem leave a House Republican Conference meeting in the Capitol on Wednesday. (Tom Williams/CQ Roll Call)
House Majority Leader Kevin McCarthy and South Dakota Rep. Kristi Noem leave a House Republican Conference meeting in the Capitol on Wednesday. (Tom Williams/CQ Roll Call)

House Republican leaders and tax writers are working to at least partially revive the state and local income tax deduction in a bid to solidify support from California GOP lawmakers in any final tax bill.

House Majority Leader Kevin McCarthy, himself a Golden State Republican, said Wednesday the proposal he’s discussing to restore the income tax deduction would be as an alternative, not in addition, to the break for property taxes.

The tax overhaul the House passed before Thanksgiving places a $10,000 cap on the property tax deduction while fully repealing the break for income and sales taxes.

Under current law, taxpayers can deduct the full amount of their property taxes and the greater of their state and local income or sales taxes. McCarthy’s proposal would allow for a limited deduction of either property or income taxes.

“I’ve always said there needs to be more for California, so it’s just fixing it,” McCarthy said when asked whether the proposal is meant to win over the three California Republicans who opposed the bill or to keep the ones who supported it on board with the final product.

California Reps. Darrell Issa, Tom McClintock and Dana Rohrabacher were among the 12 GOP lawmakers who voted against the House tax bill due to concerns over the state and local tax deduction, also known as SALT. Issa and Rohrabacher are both on Roll Call’s list of the 10 most vulnerable House incumbents, with Issa holding the top spot.

The other nine members who voted against the bill because of SALT were from New York and New Jersey. A 13th Republican, North Carolina Rep. Walter B. Jones, voted against the measure over deficit concerns. All Democrats opposed the legislation.

“The thing you’ve always got to remember, the property tax is more important on the East Coast than it is for California,” McCarthy said. “So when you want to do something for SALT, you got to go a little further.”

Timely tweaks

Chief Deputy Whip Patrick T. McHenry of North Carolina first told Roll Call on Tuesday that House GOP leaders were working on the tweak to appease lawmakers from California, one of the states that would be hit hard by full repeal of the SALT deduction.

New York Rep. Tom Reed, who voted for the tax bill believing the $10,000 cap for property taxes was enough to ensure his constituents would benefit, also confirmed that the income tax deduction is back on the table.

“I think having a natural conversation about the income tax at the local level is good,” he said, also noting property taxes are the top issue in his district and parts of New York but income taxes are more important in places like California.

Reed said leaders are still negotiating details of what they can do to restore the income tax deduction: “As you saw with the cap on the property taxes, similar type of cap conversations are expected in regards to the income tax side of that because that makes a lot of sense.”

Tax writers are continuing to explore ways to “provide tax relief to families regardless of where they live,” House Ways and Means Chairman Kevin Brady said, confirming the talks of restoring the income tax deduction. He did not provide details.

“That’s a commitment I’ve made to lawmakers in high-tax states, and I’m going to continue to work to improve it,” the Texas Republican said.

Limited conversations

McClintock said he’s had a number of conversations with leaders about the SALT deduction and their plans to restore the deduction for income taxes but he hasn’t seen any details. 

“I’ll believe it when I see it,” he said. “Our mantra should be, ‘No taxpayer left behind.’ … I could not get a firm commitment that they would leave no taxpayer behind. That’s why I voted ‘no.’”

However, McClintock said that if a proposal actually materializes, he is open to changing his vote if it meets his concerns.

Rohrabacher said leadership has not talked to him about reviving the income tax deduction but he’s “anxious” to hear about any plans to do so.

“They know that as they calculate everything out that that provision ensures that the people of California, at least in my district, will have a major increase in the tax law,” he said. “Thus, if they want to try to do something about it, I’m happy to take that and I’d be happy to take a look at what they’ve got. It would make a lot of difference to me.”

Don’t forget New York

New York Republicans Lee Zeldin, Peter T. King and Dan Donovan, who all voted ‘no’ on the House tax bill, said leadership had not talked to them about possibly reviving the income tax deduction.

Whether such a change benefits their constituents would depend on how it’s structured, Zeldin said. If, for example, the tax break for income taxes was restored, but as an alternative to claiming the property tax deduction, that wouldn’t be helpful, he said. But if a deduction cap for income taxes was added on top of the property tax cap, it could be, Zeldin added.

“It could possibly have little to no effect for us in New York. It could potentially have a great effect, but I’ve just been hearing rumors,” Zeldin said.

Zeldin said he’s had conversations with California Republicans who voted for the tax bill with the understanding that there would be further changes to the SALT deduction.

“I think that they’re trying to pass a bill,” Zeldin said when asked if GOP leaders were just trying to provide political cover to California lawmakers. He said ensuring they have the votes is “a big driver above some of the other dynamics.”

California Democrats have had held several events to pressure their Republican colleagues to oppose the tax bill and slam those who supported it.

“There’s a lot of anxiety among California Republicans,” King said. “And every time they go home, they feel more anxiety.”

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