House Passes Bill to Raise Cap on State and Local Tax Deduction

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House Passes Bill to Raise Cap on State and Local Tax Deduction

A slim majority of House members approved legislation to increase the amount of state and local taxes that taxpayers could deduct from their federal taxes.

 

By a vote of 218-206, the House approved H.R. 5377. This bill would increase the cap on the federal deduction for state and local taxes from $10,000 to $20,000, and eliminate it entirely for 2020 and 2021. It would also increase the top income tax rate to 39.6% and increase the deductions for some expenses incurred by first responders and teachers.

 

The Trump tax cut bill set a cap on their ability to deduct state and local taxes. Prior to this cap, taxpayers could deduct the full amount of their state and local taxes. While theoretically available to all taxpayers, it generally benefited taxpayers with higher incomes (who are more prone to use itemized deductions rather than the standard deduction) and those who lived in states with higher taxes.

 

The Trump tax bill limited this state-and-local tax deduction to $10,000. In other words, if someone paid $17,000 in state and local taxes, they could only deduct $10,000 instead of the full $17,000. This upset some state officials, especially those who represent states that have a large share of high-income taxpayers paired with high state tax rates.

 

In response, some states passed laws that were an attempt to circumvent this cap. These generally involved classifying taxes in certain circumstances as charitable contributions. Since the tax bill still allowed full deductibility of charitable contributions, this would have allowed these state taxpayers to skirt the state-and-local deduction cap.

 

The Treasury Department issued a rule that essentially invalidated these state laws for federal tax purposes. Earlier this year, Sen. Chuck Schumer, who represents New York, introduced Senate Joint Resolution 50 to disapprove of this Treasury regulation. If passed, the effect of this disapproval resolution would have been to be allow states to pass laws that circumvent the tax cap, essentially repealing it on a state-by-state basis. The full Senate did not agree with Sen. Schumer, however. In October, the resolution failed by a vote of 43-52. The vote was largely along party lines, with only Republican Rand Paul voting for the resolution and Democrat Cory Gardner opposing it.

 

The House bill now heads to the Senate for consideration. Given the Senate’s action on Sen. Schumer’s resolution, it is unlikely that it will succeed in that body.

 

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