Why a popular tax break in Pa. and N.J. could be on chopping block

WASHINGTON — In a place such as Moorestown, the leafy South Jersey suburb, the average homeowner shells out an eye-popping $11,693 a year in property taxes.

But there's at least one benefit at this time of year: deducting that bill on your federal income taxes. For a homeowner near the top tax bracket, it could mean saving more than $4,000.

That benefit, though, might not last.

House Republicans have called for eliminating the popular deduction — one claimed by millions of New Jerseyans and Pennsylvanians — as part of a plan to simplify the tax code and cut rates across the board.

GOP leaders insist that under their proposal, which would erase many special carve-outs, everyone will ultimately pay less in federal taxes.

But it won't be so easy. No one willingly gives up a benefit.

"I'm going to fight this tooth and nail," said Rep. Bill Pascrell (D., N.J.), the only New Jerseyan on the tax-writing Ways and Means Committee.  New York Gov. Andrew Cuomo, a Democrat,  has called the idea "devastating."

Residents in their two states, along with Californians, reap the most from the provision that lets people deduct state and local tax payments on their federal tax returns, according to a study last year from the Tax Policy Center. It largely benefits wealthy people in high-tax states.

Pennsylvania, due to its population size, is also near the top of the states whose residents invoke the deduction.

A study from the Tax Policy Center estimates repealing the deduction for state and local taxes (SALT) would cause the average federal income tax bill to rise by $2,348 nationally for those filers who claim the deduction. New Jerseyans who now claim the benefit would take the fourth-biggest hit in the country — a $3,522 increase on average. Pennsylvania filers claiming the credit would pay an extra $2,182, the 12th-highest increase.

Republicans say the change is part of a broader package that would still lower overall federal income taxes for everyone.

The fight could have a major impact on taxpayers' pocketbooks and on the political fortunes of President Trump and congressional Republicans.

After falling flat in trying to repeal and replace Obamacare, Trump and his allies can ill afford a big stumble on their second major legislative push. But the challenge of turning this campaign promise into policy may be just as thorny.

As with health care, Republicans agree on the premise — lowering taxes and simplifying the tax code — but they face the same kind of internal divisions, policy trade-offs, regional differences, and interest-group pressure that derailed their health plan.

The Texas Republican leading the House push, Kevin Brady, told reporters last week that under his plan New Jerseyans, Pennsylvanians, and everyone else would still pay less in federal income taxes, even without the deduction.

He advocates a tax code with fewer intricacies that only benefit certain groups. Most people would pay lower rates, see a big boost in their standard deduction, and file on a form so simple it fits on a postcard.

"Rather than keep Washington taxes high and have just a few get relief from state and local taxes, we're proposing to lower taxes for everybody at every income level so they can use those dollars for what's important to them — which may include their state and local taxes," said Brady, the Ways and Means Committee chairman.

But a New Jerseyan whose federal income taxes drop might still see their savings significantly shrink without the property-tax deduction.

Current law lets filers reduce their federal taxable income by whatever they paid in property taxes and either income or sales taxes paid to state and municipal governments.

About 41 percent of New Jersey filers claim the deduction, helping take a bit of the sting off their $8,500 average property taxes. Without it, some 1.8 million filers in the Garden State would have paid an average of $3,500 more in taxes in 2016, the fourth-biggest hike in the nation, estimates the Tax Policy Center. (The exact numbers, of course, would change if the GOP overhaul is approved and other tax cuts implemented, but the study gives a measure of what's at stake.)

In Pennsylvania, 1.8 million filers would see about $2,200 added to their federal income tax bill, on average, the tax center says. About 3 in 10 Pennsylvania tax filers claim the deduction.

It's a provision especially helpful in a place such as Lower Merion, where the median property-tax bill is about $8,700.

Nationwide, about 28 percent of all tax filers claimed the deduction in 2014, the latest year for which IRS statistics are available, according to a March report from the Tax Foundation.

It mostly helps high-income filers: They generally have more expensive homes and pay more property and income taxes, so they can take larger deductions. More than 88 percent of the benefits went to people with incomes of more than $100,000, the report said.

"This is one of those rare provisions in the federal income tax code that is a transfer from lower-income individuals to higher-income individuals," said Jared Walczak, who wrote the study.

It also creates an imbalance: six states — New Jersey, Pennsylvania, New York, California, Illinois, and Texas — claimed more than half of the deductions under the provision. That leaves taxpayers elsewhere to carry a larger burden for funding the federal government, Walczak said.

But the states that benefit wield large congressional delegations, giving them leverage to fight efforts to roll back the deduction.

Supporters say the provision averts "double taxation" — forcing people to pay federal income taxes on money they already turned over to their state or local governments.

Critics say it's a break that encourages mayors and governors to raise taxes, because they know some of the pain will be offset by the federal tax break.

"Subsidizing overly high taxes by local government — that's a dumb thing to do," said Grover Norquist, the antitax crusader who heads Americans for Tax Reform. He said he supports eliminating the deduction as part of a broader move to reduce taxes all around.

Those who live in tax-heavy places like New Jersey might net a smaller federal tax cut, he said in an interview, "but that's your mayor's problem. That's your governor's problem."

To lower rates without exploding the deficit, Republicans need to eliminate big carve-outs. This one is among the largest, projected to cost the federal government — and save taxpayers — close to $550 billion between 2016 and 2020.

The break has been targeted by would-be reformers several times over the years, only to be saved by the big states that reap the benefits, said Frank Sammartino, who coauthored the Tax Policy Center report last year.

"These deductions for state and local taxes are very popular," he said.

Pascrell said it was the first thing he mentioned in a Thursday meeting with Brady.

Far fewer people will need the deduction if his plan is adopted, Brady told reporters.

That's because his plan calls for boosting the standard deduction to $24,000 for married couples filing jointly, up from $12,600. So fewer than 5 percent of people would itemize their taxes, which is necessary to claim the state and local deduction, he said.

But even his standard deduction boost of $11,400 falls short of the roughly $17,000 average write-off for New Jerseyans who use the state and local tax break. In Pennsylvania, it would be only slightly better than the nearly $11,000 deducted by the average filer, according to IRS data.

Brady hopes to have a full bill introduced by this spring.

As in many issues, Trump could prove to be the wild card. The New Yorker may be more sensitive to demands from his home state, and opt for having his own version of a tax plan.

During his campaign he called for limiting deductions — not eliminating them.