Earlier this week, Key Republican leaders released the legislative text for their plan to simplify the tax code and cut taxes for individuals and corporations. Included in the language is a provision that will prevent individuals from itemizing a deduction for state and local income taxes (SALT), while retaining a deduction for state and local property taxes that will be capped at $10,000. According to the Tax Foundation, SALT deductions are estimated to be worth more than $100 billion in individual income per year. The state of California receives 19.6% of the income earned from SALT deductions, where the average filer claims $18,438 annually from the deduction. This amounts to 8.1% of adjusted gross income for the state according to the Tax Policy Center TPC.
The $100 billion of income generated by SALT is disproportionately distributed among blue-state voters and the provision has been targeted by Republicans for elimination to compensate for their $1.5 trillion tax cut proposal. In the House, GOP tax negotiators have met heavy resistance from blue-state Republicans who represent constituents with the highest state income tax rates in the country. 11 House Republicans from high-tax states voted against the GOP budget resolution in protest of proposals to eliminate SALT. Before the text of the bill was released, House Ways and Means Chairman Kevin Brady (R-Texas) brokered a deal that will retain state and local property tax deductions in order to win over blue-state Republicans, but capping the deduction at $10,000 takes $8,438 of annual income off the table for California filers. The $10,000 cap is not per-property but is the aggregate cap for an individual’s entire property holdings.
In addition, the tax plan will immediately double the estate tax exemption and repeal the tax entirely in six years. Data from the Tax Policy Center suggests repealing the estate tax is a victory for agriculture communities where the “death tax” is a major financial obstacle for family farmers who give away 40% of their base value to the federal government with each new generation.
Despite the objections of blue-state Republicans over the SALT repeal, the “Tax Cuts and Jobs Act” is considered must-pass legislation for House Republicans. The true test of the GOP’s tax plan will come in the Senate from Republican centrists and deficit hawks who clashed with President Trump in the past or publicly criticized tax proposals that add to the deficit.