New York Republican Congress members urged U.S. Treasury Department ("Treasury") Secretary Steven T. Mnuchin to reconsider a proposal to eliminate the federal deduction for state and local taxes ("SALT") (see Briefing on the tax plan, by Secretary Mnuchin and National Economic Council Director Gary Cohn).

In a letter addressed to Secretary Mnuchin, Congressperson Dan Donovan joined six other Republican representatives in voicing the concern that the SALT deduction elimination would result in double taxation, forcing U.S. citizens to pay federal taxes on money that had been paid to state and local governments. The representatives argued that the ramifications of eliminating the SALT deduction would have a particular impact on New York residents:

"The deduction for state and local taxes matters for all Americans, but it affects New York disproportionately. The state has 3.2 million residents who claim the deduction, and New York's itemizers make up primarily lower- and middle-income households: 85% of those who claim the SALT deduction earn less than $200,000 in annual income. . . . New York proudly pays more than its fair share to the federal government. The state has been a net payer to the federal government for decades, and while New York City residents pay $96 billion in personal income taxes, the city receives back only about $61 billion from the federal government."

Congressperson Donovan said that eliminating the SALT deduction "would be reckless and devastate middle-class Americans."

According to an article published in The Hill, U.S. House Ways and Means Committee Chair Kevin Brady stated that the committee will hold two tax reform hearings in July. One hearing will consider tax reform benefits for small businesses, while the other will focus on tax reform benefits for families and individuals.

Commentary / Mark Howe

There are three fundamental reasons that make the SALT deduction a prime target. First, eliminating this deduction is generally viewed as a revenue raiser and an aspect of "tax simplification." House Speaker Paul Ryan and Treasury Secretary Mnuchin have alluded to this "simplification." Second, as one study (James R. Nunns, Leonard E. Burman, Jeffrey Rohaly, Joseph Rosenberg, Benjamin R. Page, "An Analysis of the House GOP Tax Plan," Tax Policy Center, September 16, 2016) shows, households in the top 0.1% are expected to receive an average tax cut of roughly $1.2 million per year, whereas a middle-income household is expected to receive an average tax cut of approximately $260 per year. Roughly five thousand middle-income households will receive an aggregate tax cut (in absolute dollars) equal to that of one high-income household. An Electoral College map from time.com sharply illustrates the Electoral College split in the 2016 election, and the high-income households are disproportionately resident in the blue counties, which are generally in high state and local tax jurisdictions. In light of the relative impact of the proposed tax cuts and the Electoral College map, one mitigating factor would be ridding the Tax Code of the deduction for state and local taxes. The letter from Congressman Dan Donovan urging Secretary Mnuchin to reconsider eliminating the SALT deduction demonstrates the significant effect that such an elimination would have on New York residents. Third, this target has the benefit of simple drafting, as it merely requires a deletion in the Code rather than a complicated rewrite. This drafting simplicity may be an important factor, given that the Administration (at least as of April 26, 2017) had not put together a tax-writing team.

For asset managers whose businesses are in high tax states, and those of their investors who are also in high tax states, this element of paying for tax reform should be watched. Chairman Brady's hearings on tax reform in July may provide clues as to how serious Congressional Republicans are in taking away the deduction for SALT as they seek to reduce marginal rates.

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