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Congress Unveils Federal Tax Plan Eliminating State and Local Tax Deductions

November 3, 2017
Yesterday, House Republican leadership released the full details on its long-awaited tax reform plan, the “Tax Cuts and Jobs Act.”
 
Among other items, the bill introduces a new structure of income tax brackets, lowers the corporate tax rate and doubles the standard deduction while eliminating most deductions, including the deductibility of state and local income and sales taxes. The plan would cap the deduction for property taxes.

Repealing the state and local deduction, known as SALT, means that millions of Americans will be taxed twice on the same income, once by the state and then again by the federal government. Rather than lowering taxes, a repeal would in effect shift the tax burden from the federal level to the local level. 
 
Utilized by more than 6.1 million California taxpayers in 2015, the SALT deduction benefits taxpayers in all income levels and makes the high cost of living more affordable in states like California. In 2015, the average SALT deduction amounted to $18,438.
 
Eliminating the deduction for state and local income taxes and capping the deduction for local property taxes at $10,000 and for home mortgage interest for newly purchased homes at $500,000 would eliminate a key incentive for homeownership in California and destabilize the housing market. Millions of California taxpayers would face thousands of dollars in higher taxes if this proposal becomes law. Ending these deductions would also impact the industries that depend on a strong housing market. In addition, the sales tax deduction incentivizes spending and economic growth; ending it could harm the economy.
 
The SALT deduction reflects a longstanding partnership between the federal, state and local governments. It ensures that local governments are able to provide essential public services and infrastructure to our residents, including police, fire, roads, and schools. A recent report from the Government Finance Officers Association notes, that if the SALT deduction is eliminated it would “…result in job losses, reduction in spending on capital equipment and decrease in infrastructure investment.”
 
To ensure that taxpayers are not double taxed, local governments are able to maintain critical public services, and homeownership retains key incentives, the League of California Cities is continuing to urge Congress to maintain the full SALT deduction. 
 
Next Steps
 
The House Ways and Means Committee will likely start taking up the proposal on Monday, Nov. 6. If the committee approves the bill, it would go to the full House a week later.
 
Also the week of Nov. 13, the Senate Finance Committee will likely consider its version of tax reform. If approved, the full Senate would take up the bill prior to Thanksgiving.
 
Both chambers hope to go to conference with the House and Senate versions of the bill and to have the conference report to the President for approval before Christmas. 
 


 
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