Republicans plunged into negotiating the future of popular tax breaks for homeowners and large families Wednesday while moving to shore up party unity around a tax plan that critics fear would raise taxes on some in the middle class and add to the deficit.
Top tax writers are working to persuade rank-and-file Republicans to set aside their focus on maintaining tax breaks, such as the ability to deduct state and local taxes, and on dramatically expanding the child-care tax credit so that they can set their sights on the greater goal of passing a package that fulfills the GOP promise of cutting taxes for most people.
“There’s a lot of fear out there about changing the code,” said Rep. Tom Reed (R-N.Y.), a member of the Ways and Means Committee. “People are just risk-averse.”
House Ways and Means Chairman Kevin Brady (R-Tex.) is leading five policy sessions over two weeks, as part of a broader push by GOP tax writers to win over colleagues whose votes will be critical to passing a tax bill by the end of this year.
Brady also huddled at a downtown steakhouse Monday night with a small group of GOP lawmakers from high-tax states seeking a compromise on the contentious issue of the proposed elimination of the deduction for state and local taxes.
Among options under discussion: giving individual taxpayers a choice of deducting mortgage interest or state and local taxes, but not both, or capping the deductibility of property taxes on high-value homes.
Lawmakers have a tricky task ahead to write detailed legislation without alienating members, who will be under intense pressure from constituents and lobbyists to preserve cherished tax breaks.
Each detail the lawmakers fill in will crystallize who will win or lose as a result of changes to the tax code and could fracture support for the plan.
At particular issue has been the proposed expansion of the child tax credit and whether Republicans should save the widely used deduction for state and local taxes.
“I think that the sales job of tax reform was botched from the beginning, in that the president was promising everybody a big tax cut and now they’re going down that road — and if there’s a big tax cut and there are losers, everyone gets upset,” said Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget. “The reality of tax reform is it creates winners and losers, and if we don’t want to create any losers, we’re limited to the tax cuts.”
One message Republicans have been trying to communicate about the web of changes in the tax plan is that people will gain a much larger standard deduction — but that will mean a loss of individual deductions that are an important benefit for a minority of taxpayers.
The debate over the state and local tax deduction has emerged as one of the biggest fights ahead. The deduction, taken by most voters who itemize their taxes, is particularly valuable in high-tax states, such as New York, New Jersey, California and Connecticut.
If lawmakers attempt a limited repeal of the state and local tax deduction, they could make the tax code even more complicated, have uncertain effects on revenue and also risk the ire of the powerful real estate lobby.
Rep. Chris Collins (R-N.Y.) described two of several options that were discussed at the Monday night dinner. One would give individual taxpayers a choice: deduct their mortgage interest or deduct their state and local taxes, but not both. In New York, Collins said, it is not unusual for taxpayers to pay yearly taxes of $20,000 or more on a modest single-family home — outstripping their mortgage interest liability. Another option, he said, would be to cap the deductibility of property taxes on high-value homes.
Many Republicans from high-tax states such as New York, California and Illinois say they’re comfortable getting rid of a tax break for the rich, especially when the rich are Democrats. Democrats represent the majority of the states and congressional districts where the state and local tax deduction is heavily used.
“It is bad public policy,” said Rep. Devin Nunes (R-Calif.). “It is mostly a tax cut for the rich. I’m not the party of the rich. It’s on the left, and they want to protect it.”
The real estate industry has slammed the idea of eliminating the state and local tax deduction, and a major lobbying group said that although the idea of giving homeowners an option to choose deductions hasn’t been formally proposed, it could result in a tax increase on millions of homeowners.
“Asking homeowners to choose between the mortgage interest deduction and the state and local deduction they enjoy today is asking them to give up an incentive for homeownership and to suffer a drop on the value of their home,” William E. Brown, president of the National Association of Realtors, said in a statement. “Such a proposal would also erode much of the ‘simplification’ that’s been promised throughout these discussions.”
Lawmakers face a similar challenge in deciding how much to expand the widely used child tax credit. Republicans have argued that expanding that credit would be a boon to middle-class families, and a number have rallied around a proposal from Sens. Marco Rubio (R-Fla.) and Mike Lee (R-Utah) to double its value.
If lawmakers decide to double the child tax credit and phase it out at higher income levels, it could help shelter large families who would lose the benefit of the personal exemption, worth $4,050 per family member. An analysis of the entire tax plan that assumed the credit would be increased by 50 percent found that it would increase the deficit by $2.4 trillion over a decade, $900 billion more than Senate Republicans have agreed to in their proposed budget resolution. According to Goldwein’s estimates, doubling the tax credit would add another quarter-trillion to the cost.
Leaders are in the process of convincing members they may have to moderate their expectations about expanding the child tax credit.
“It’s something that tremendously helps middle-income families,” said Sen. John Thune (R-S.D.), a top deputy to Senate Majority Leader Mitch McConnell (R-Ky.). “I’d like to double it, but a lot of it will depend on what we have space for.”
The challenge is that the pieces of the tax plan fit together differently for each family and taxpayer. Once the details of the plan are known, it will be even clearer who will lose — which could help torpedo the whole effort.
In an editorial published on Breitbart News, Sen. Rand Paul (R-Ky.) indicated that any plan that raised taxes on anyone would be a non-starter.
“This isn’t about the tax cut being perfect. It’s just about it not being a tax HIKE because of some policy wonk goal no one in America is asking for,” Paul wrote.
Mike DeBonis contributed to this story.