New Tax Reform: Deducts Property Taxes or Mortgage Interest?

Homeowners would be forced to choose between two popular tax deductions – one for local property taxes, the other for mortgage interest – under a potential compromise that House Republicans are considering as they craft the evolving tax revamp.

The nearly $6 trillion tax overhaul plan being pushed by President Donald Trump and Republican leaders in Congress promises to retain the deduction of mortgage interest from federal income taxes – a cherished tax break used by about 30 million Americans that supporters say is a catalyst to homeownership.

Republicans in high-tax states such as New York, New Jersey and California are balking at the proposal from Trump and GOP leaders to eliminate the federal deduction for state and local taxes, fearing the financial hit on their constituents.

The possible deduction tradeoff is among several compromises being floated by Republican lawmakers to gain the support of their defecting colleagues from high-tax states. Their opposition threatens to derail tax legislation that's seen as a political imperative for Republicans and Trump.

Rep. Chris Collins, R-N.Y., said Tuesday he and several other Republicans discussed possible ways around the current impasse on Monday with Rep. Kevin Brady, R-Texas, who heads the tax-writing House Ways and Means Committee.

"It looks like we're going to have some compromise" on state and local tax deductions, Collins said Tuesday at the Capitol. "I am confident there will be an accommodation for the high-tax states."

But Republican Sen. Tim Scott of South Carolina, a member of the Senate's tax-writing Finance Committee, wasn't sold on the deduction tradeoff idea.

"What does it save and where does it get us? Should the average South Carolinian subsidize the high property taxes in other states?"

Scott noted that the state and local deduction costs the government an estimated $1.3 trillion in lost revenue over 10 years. It covers local property taxes and state income taxes. With more than $1 trillion having to be mined from closing loopholes and ending deductions to finance the Republican plan's sweeping tax cuts, regional divisions within the GOP have jumped to the fore.

The high-tax, high-income states – New York, Connecticut, New Jersey and California – that urgently want to preserve the state and local deduction are Democratic strongholds, but with plenty of Republican lawmakers. A coalition of 70 lawmakers from those so-called blue states, including 20 Republicans, are fighting the proposed repeal of the deduction, arguing it would subject people to being taxed twice.

Collins said other possibilities discussed with Brady included "some either-ors" like the home deduction tradeoff and "maybe some capping." That could mean limiting the amount homeowners could deduct on their local property taxes, for example, to correspond with a maximum $1 million of the home's value, he suggested. Or further reducing the cap on the federal mortgage interest deduction, which currently allows homeowners to deduct interest on up to $1 million in mortgage debt.

Changes like those "would take the argument that this is a tax cut for the rich off the table," Collins said.

Trump, top administration officials and Republican architects of the plan insist that it would provide badly needed tax relief for the middle class – and wouldn't benefit the wealthy.

The wealthiest sliver of the nation would reap big benefits, however. The plan would drop the tax rate for Americans making a half-million dollars or more by almost 5 percentage points. And the blueprint calls for eliminating the estate tax – paid by those with multimillion-dollar inheritances, a boon for wealthy individuals who inherit businesses, investments and real estate. Also slated for elimination is the alternative minimum tax, a supplemental tax for wealthy individuals and corporations that enjoy exemptions lowering their income tax bills.