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Taxes in forefront as Higgins, Reed talk with Trump

WASHINGTON – The day could come soon, if some Republicans get their way, when filing your federal tax return would be as simple as filling out a postcard.

But Democrats, as well as Republicans from high-tax states such as New York, worry that many residents of such states would pay a heavy price for that simplicity: dramatically higher federal taxes.

Reps. Brian Higgins and Tom Reed of Western New York went to the White House Tuesday to discuss tax reform with President Trump. But the two lawmakers said the meeting focused more on the president's passion for tax reform than on the possible proposal that concerns them the most: the elimination of the state and local tax deduction.

Many middle- and upper-income New Yorkers rely on those deductions to lower their federal taxes.

Trump is scheduled to announce Wednesday additional details of a tax reform framework in Indianapolis,  but Reed said the announcement will likely keep open the question of whether that key deduction remains.

Trump’s tax plan cuts individual and corporate taxes, eliminates many deductions

"The framework is not going to deal with this level of detail," said Reed, a Republican from Corning.

That means Congress will have to balance two divergent arguments about the decades-old deduction for state and local taxes

One of those arguments comes from New Yorkers such as Higgins, a Buffalo Democrat. Killing the state and local tax deduction amounts to "taking aim at hardworking Americans, cutting off the ability for many middle class families to achieve the American Dream of homeownership," he said.

But the other argument comes from tax experts such as Morgan Scarboro of the nonpartisan Tax Foundation. Eliminating the state and local tax deduction is one of the few ways Congress can find the money to pay for tax simplification – which would benefit Americans everywhere – without busting the budget and growing the deficit, she said. Eliminating the deduction will save the federal government $1.9 trillion over 10 years, Scarboro added.

"In tax reform, you can't have dessert without eating your vegetables, too," she said. "You have to take some good with some bad."

Trump didn't mention the state and local tax deduction issue as he opened his meeting with Higgins, Reed and other members of the tax-writing House Ways and Means Committee on Tuesday. Instead, he focused on the central goal of his tax reform proposal.

"We must make our tax code simple and fair," Trump said. "It's too complicated. People can't do it."

Axios, a news website, recently revealed some details of Trump's plan. Three sources familiar with the plan's details told Axios that it would:

  •  Cut the top individual tax rate to 35 percent, down from 39.6 percent today.
  •  Reduce the number of tax income brackets from seven to three.
  •  Double the standard deduction, which is currently $6,350 for individuals and $12,700 for couples
  •  Slash the corporate tax rate from 35 percent to 20 percent while eliminating most corporate tax loopholes.

For most taxpayers in Western New York, the most important of those proposals is the one that would double the standard deduction. That's because if that actually happens, many lower-income renters and homeowners would get a break that could exceed the one homeowners would lose if the state and local tax deduction were to disappear.

In Erie County, the state and local tax deduction averaged $3,459 in 2014, the Tax Foundation calculated. So it would be worthwhile for families to itemize if they could combine that with a home mortgage deduction, charitable giving deduction and other write-offs that together exceed the current $12,700 standard deduction.

But in a new world without that state and local tax deduction, the same family wouldn't have to itemize unless it could compile a list of deductions totaling more than $25,400. Even without the state and local deduction, lower-income homeowners obviously would have a hard time compiling that much in deductions, which is why even Reed and Higgins conceded that doubling the standard deduction would be a net positive for taxpayers on the low end of the economic scale.

"Expanding the standard deduction goes a long way," Reed said. "Ninety-five percent of our taxpayers would no longer be itemizing."

New York lawmakers still oppose ending the state and local tax deduction, though, because of the damage it could do to the upper middle class and wealthy taxpayers, as well as the state economy writ large.

Proof of that damage can be found in Manhattan. There, the typical taxpayer got a state and local tax deduction of $24,898 in 2014 – which is almost as much as the doubled standard deduction Trump is suggesting. Such taxpayers would almost certainly pay much more in federal taxes under a system where they could not take that state and local tax deductions.

Of course, there are upper middle class and wealthy taxpayers in Buffalo, Amherst, Clarence and a host of other communities in Western New York who enjoy the same sort of huge state and local tax break that the average Manhattan resident gets.

And preserving the state and local tax deduction isn't just about keeping taxes low for those people. It's about keeping the state economically competitive, said Richard Schroeder, chief investment officer at Level Financial Advisors in Amherst.

Eliminating that deduction would make overall taxes so much higher for so many in New York that a company like Amazon wouldn't even consider locating facilities in the state, he said.

"It would really put the state at a competitive disadvantage," he said.

What's more, the move could depress housing values throughout the state, Schroeder said. After all, if people had to pay more in federal taxes because that key tax deduction disappeared, they would have less to spend on housing.

Critics of the state and local tax deduction note that more than half its benefits flow to just six states: New York, California, Illinois, New Jersey, Pennsylvania and Texas. They say taxpayers in the other 44 states have every right to object to essentially subsidizing high taxes and plentiful state government services in those six states.

"Increasingly a costly anachronism which favors high-income earners in wealthy states, the state and local tax deduction has long outlived its usefulness," Jared Walczak of the Tax Foundation said in an analysis earlier this year.

That's not how lawmakers from Western New York see it, though.

"I share the concerns of many when it comes to the elimination of state and local deductions," said Rep. Chris Collins, R-Clarence. "This loss could reduce the amount of discretionary spending for hard-working families in our community, and I will fight to keep it should its elimination be in the ultimate bill.”

Reed, meanwhile, said that he is considering offering a compromise proposal in which the state and local tax deduction is converted to a tax credit.

Doing that could reduce taxes for lower-income taxpayers while boosting them for the wealthy, the Tax Foundation said in a recent report.

Reed has not fleshed out a full proposal for that tax credit yet, and he may not need to, if his fellow Ways and Means Committee members decide the state and local tax deduction has to remain to win the votes of lawmakers from states such as New York and California.

In any case,  Reed vowed to fight to make sure that tax reform doesn't hurt New Yorkers.

"I want to make sure I'm a loud voice for the people we represent," he said.




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