Top House Republican expects a deal to keep a limited state and local tax deduction

Reporting from Washington —  A top House Republican said Wednesday that he expected to strike a deal soon to keep an apparently limited version of the state and local tax deduction for individual Americans, a break that party leaders had targeted for elimination in their tax overhaul plan.

House Ways and Means Committee Chairman Kevin Brady (R-Texas) indicated the deal would involve allowing individuals to write off property taxes but not state and local income or sales taxes.

Brady, whose committee is writing the tax legislation, also confirmed that the bill would not make any changes to the ability of companies to deduct state and local taxes as a business expense. Democrats have criticized Republicans for proposing to kill the break for individuals but keep it in place for businesses.

“We think there is a way forward to help them with some of those local taxes, especially in the area of property taxes, so that’s where we’re having very good discussions with those lawmakers,” Brady said at a breakfast sponsored by the Christian Science Monitor.

“At the end of the day, we want taxpayers to be better off in tax reform than they are today,” he said.

Brady also suggested that the tax legislation still could make some changes to 401(k) retirement plans to encourage more saving, even though President Trump promised Americans on Twitter on Monday that there would be “NO change to your 401(k).”

Trump told reporters Wednesday that he posted the tweet in an attempt to end talk about 401(k) changes because “that’s one of the great benefits to the middle class.”

Lawmakers from California, New York, New Jersey and other high-tax states have been fighting to save the individual state and local tax deduction because killing it could lead to a large tax hike for many of their constituents.

Some House Republicans from New York and New Jersey have threatened to vote against the Republicans’ 2018 budget this week unless a deal is reached to save the deduction. Their protest could sink the budget resolution, which must be passed if Republicans want to push a tax overhaul through the Senate with a simple majority vote.

Brady told reporters Wednesday that he has been meeting with lawmakers from districts that would be hard hit by the tax deduction, and that they were close to an agreement.

Brady said he met with the lawmakers Tuesday night and had another meeting planned for Wednesday.

“I expect before the bill is laid out next week that a solution will be announced,” he said.

Brady said decisions still being made on the income levels for new tax brackets and the size of a promised increase in the child tax credit would determine whether people who now claim the state and local deduction would be better off under the Republican plan.

Sen. Marco Rubio (R-Fla.), who has proposed doubling the child tax credit — to $2,000 per child — said Wednesday he was confident the expanded deduction would be included in the upcoming tax bill.

Rubio has been working on the proposal with Ivanka Trump, the president’s daughter and advisor, who was on Capitol Hill on Wednesday to promote the idea. Without an expanded child tax credit, Rubio warned, middle-income families probably would see a tax hike under the Republican bill.

“I’m not going to vote for an increase on the middle class. But we’re not going to get to that point,” he said. “We’re not that crazy around here.”

The state and local deduction is the most popular itemized deduction and is claimed by about 43 million taxpayers, according to the nonpartisan Tax Foundation. It is not available to taxpayers who take the standard deduction and do not itemize.

The break allowed Californians to reduce their combined taxable income by $101 billion in 2014 — one-fifth of the total value of the deduction nationwide, according to an analysis by the Tax Foundation.

Repealing the deduction would lead to an average tax hike of $3,218 for Californians who claim it, according to the nonpartisan Tax Policy Center.

Most of the states that would be hit hardest by the loss of the deduction are Democratic strongholds. Of the top 10 states for the deduction, President Trump carried only three in last fall’s election.

Eliminating the deduction would generate as much as $1.8 trillion over the next decade and help pay for the large tax cuts in the Republican plan that, based on details released so far, are focused on corporations and the wealthy.

Trump administration officials and top congressional Republicans said the state and local tax deduction mostly helps high earners and forces residents in low-tax states to subsidize those in high-tax states.

House Republicans from high-tax states have pushed to save the deduction by adding new limits. One proposal would limit the deduction to individuals with adjusted gross incomes of no more than $400,000, or $800,000 for married couples.

Such a limit would preserve the deduction for all but the top 1% of earners — those with adjusted gross incomes above about $465,000 — according to an analysis by the Tax Foundation. But limiting rather than scrapping the deduction would raise only about a quarter of the additional revenue that Republicans are seeking to offset their tax cuts.

Another way to raise more revenue would be to place new limits on tax-deferred savings through 401(k) plans. Reports of such limits led Trump to take to Twitter on Monday to vow there would be no changes. After the tweet, lawmakers had declined to rule out any changes but had said that they and Trump shared the goal of increasing retirement savings.

Trump suggested to reporters on Wednesday afternoon that changes could become part of negotiations with lawmakers but then indicated that he would not give in on the issue. “There are certain elements of deals that you don’t want to negotiate with … [Brady] knows how important 401(k)s are,” he said.

Earlier in the day at the breakfast, Brady had reiterated that “we are continuing discussions with the president all focused on saving more and saving sooner.”

But Brady said that half of people using 401(k) or individual retirement accounts are saving $200 a month or less and people for the most part aren’t saving until they are older.

“We think in tax reform we can create incentives for Americans to save more and save sooner. … so we are exploring a number of ideas in those areas,” he said.

One idea that reportedly has been under consideration is to limit the annual amount that workers could put into their 401(k) accounts to defer tax payments until they withdraw the money in retirement, presumably when they are paying a lower tax rate.

The idea would be to funnel retirement savings into Roth-style IRAs, which tax a person’s contributions upfront and then allow the money to be withdrawn tax-free. Such a move would increase incoming tax revenues to the federal government and help offset the money lost by lowering tax rates.

But organizations including AARP, the American Retirement Assn. and pension fund TIAA strongly oppose any changes to 401(k) rules, arguing that would reduce incentives for retirement saving.

However, some argue that shifting more savings to Roth-style IRAs could benefit some Americans, in part because distributions from those plans usually don’t count as income when determining whether a retiree’s Social Security benefits are taxable. Distributions from 401(k) plans count as income.

jim.puzzanghera@latimes.com

Twitter: @JimPuzzanghera

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UPDATES:

12:20 p.m.: This article was updated with comments from President Trump and Sen. Marco Rubio.

10:50 a.m.: This article was updated with information on changes being considered to 401(k) plans.

7:55 a.m.: This article was updated with comments by Rep. Kevin Brady on 401(k) plans.

This article originally was published at 7:05 a.m.