Top House Republicans said Tuesday they were exploring changes to their tax plan that would lower tax bills for Californians and others who pay high state income taxes — including by allowing Americans to deduct some state income tax payments from what they owe in federal taxes.
House Ways and Means Chairman Kevin Brady (R-Tex.) told reporters Tuesday that tax writers are looking at a number of ways to give relief to residents of high-tax states. One would involve opening up the property tax deduction, capped at $10,000, to state and local income and perhaps sales taxes. Others would involve expanding eligibility for the child tax credit to more affluent households or simply rearranging the individual tax brackets so taxpayers pay lower rates.
But making any of those work within the larger plan could be difficult. Brady said all of the options cost "significant" amounts of revenue, and the overall plan cannot cost more than $1.5 trillion over the coming decade. "It's got a pretty big figure to it," he said of the potential expanded deduction.
House Majority Leader Kevin McCarthy (R-Calif.) said that he, too, favored expanding state and local tax deductibility, and also said he hoped the House bill's limit on the deductibility of mortgage interest would be raised. The House bill excludes deductions of interest on loans larger than $500,000; the Senate bill keeps the current $1 million threshold intact.
McCarthy also said he was looking at provisions that could help victims of disasters such as the wildfires that have hit California in recent months, including a deduction for property losses. "There's a lot of things that Californians are working on," he said.
The negotiations took place as House and Senate Republicans prepared for a conference committee that would meld the tax bills passed separately by each chamber into a final conference report. That legislation would then have to be passed by the House and the Senate before being sent to President Trump for his signature.
The aim is to complete that process before Christmas.
At the White House, Trump offered his own explanation of the process that's underway. "I call it the mixer," he said. "It's a conference where everyone comes together, they pick all the good things and get rid of the things they don't like."
Rep. Devin Nunes (R-Calif.), a senior Ways and Means Committee member who is also serving on the conference committee, said he did not believe that the state and local tax deduction — known as SALT — needed to be addressed in the final bill, but said he would be open to discussions.
"It's not really necessary," he said. "There's ways we can tweak it to make it better . . . but this whole SALT issue is a red herring unless you're looking for tax breaks for really, really rich people."
He said his Golden State colleagues were "listening to the mainstream media, who continue to perpetuate a rumor, which is that somehow people aren't getting tax breaks" when "it only gets better for the people of California, not worse."
Rep. Darrell Issa (R-Calif.), who represents a high-tax coastal area north of San Diego, voted no on the House tax bill and dismissed the changes McCarthy is seeking as "minuscule." He said the ability to deduct $10,000 in state taxes from their federal tax bill would not go far enough to help his constituents.
"If two people go to college, do what's right, and they're at the height of their career and they're making $150,000 apiece — which, by the way, would include school administrators, it's not that hard in California to be making that — at the pinnacle point of their career, they're being completely disenfranchised by the existing bill or by the one that we just mentioned where they would have this '$10,000,' " Issa said.
Issa said he was open to compromise but said he didn't foresee the bill being able to move far enough in his direction. He predicted that some of his California GOP colleagues who voted yes on the bill in the expectation of future changes would end up without much to show for it.
"Once you vote yes to move it along, you're stuck with you already voted yes. . . . And so there are only three of us that voted no, and there are only three of us that can vote no again," Issa said, referring to the no votes by California Republicans
Rep. Mimi Walters (R-Calif.) represents a high-tax Orange County district but voted in favor of the tax bill. She's now seeking assurances that the state and local property tax issue will be resolved, and said that if the $10,000 deduction can be applied to state taxes, or split between state and local taxes, that's enough to get her to vote yes.
Walters said she would like to see the deduction higher than $10,000, but understands that's unlikely to happen because of the high cost it would entail.
Walters acknowledged that her constituents have been concerned about the legislation, particularly the state tax and local taxation issue. "Tax reform is a complicated issue and it's taking a lot of education," Walters said. But she insisted that the bill would ultimately prove a political plus for the GOP despite poor polling numbers.
The House also faces pressure to eliminate the corporate alternative minimum tax, a flat tax aimed at ensuring that companies don't use deductions to avoid paying taxes. The AMT, which remains in the Senate tax plan, has kicked up opposition from many business sectors — including California technology companies — concerned that they will lose the ability to use various tax incentives preserved in the new code, such as the research and development tax credit.
"It's one of the priorities, no doubt," Brady said of eliminating the corporate AMT.
Nunes said he saw little desire to keep the Senate provision in the final bill: "I'm guessing they just needed something quick to make the bill work."
Compared with members from high-tax states such as New York and New Jersey, the California Republicans were not among the most vocal critics of the push to partially repeal the popular SALT deduction as the tax bill moved through the House. Only three of the 13 GOP members of the state's delegation ultimately voted against the bill, but McCarthy assured them he would continue pushing to improve the bill as it was taken up in the Senate, according to GOP aides familiar with the process.
Neither the House nor Senate bills contain provisions allowing for the deductibility of state income taxes, which would typically mean the provision would be off limits in a conference. But House Republicans believe they can "airdrop" the provision, in congressional lingo, to firm up support from Republican House members in California and other high-tax, largely Democratic states.
Erica Werner contributed to this report.