Trump's tax plan would eliminate a popular deduction in Pa., N.J.

Trump Tax Plan
The Internal Revenue Service building in Washington.

President Trump’s tax plan is aimed at slashing the burden for individual taxpayers. But it would also eliminate a deduction that millions of people – largely high-income earners – in Pennsylvania and New Jersey use to get a break on their state and local taxes.

Key details of the plan, unveiled Wednesday, are still being worked out – for example, Trump’s plan would reduce the seven income tax brackets to three brackets of 10 percent, 25 percent, and 35 percent. Which incomes would fall under those brackets has not been decided yet, officials said.

“You don't know what the bracket cutoffs are, so you can't compare them to current law,” said Alice Abreu, a tax law professor at Temple University. “What you can say fairly certainly is that [the plan] benefits people at the higher end of income distribution.”

The country’s highest-income earners would see their federal income tax fall from 39.6 percent to 35 percent. The plan would also eliminate the 3.8 percent investment tax for Obamacare, and the estate tax, which largely affects the wealthy.

The plan would also double taxpayers’ standard deduction, increasing it for married couples to $24,000. In turn, Trump would eliminate all itemized deductions, other than mortgage and charitable deductions.

That’s where about 3.6 million people in Pennsylvania and New Jersey might end up paying more. Those residents deduct money from their federal taxable income to offset the cost of state and local taxes. The practice is particularly popular in states such as New Jersey with high income and property taxes, and is used mostly by high-income earners.

“It’s one of the few tax code provisions that is quite regressive,” said Jared Walczak, a policy analyst at the Tax Foundation, a Washington policy institute. “If you go to an upper-income community, you’ll often see a significantly higher level of attention paid and more money spent on amenities. And some of that cost is being borne not just by local residents who get to enjoy features like parks, community centers, or just better roads, but to some degree by taxpayers across the country.”

Proponents say state and local deductions give cities and states more leeway to raise money because selling a tax increase is easier for lawmakers when some residents can offset it on their tax returns.

“The theory goes that it allows states to raise their income and property taxes, which means they’re able to pay more in services,” said Richard Auxier, a research associate at the Tax Policy Center, a Washington think tank.

But if the state and local deductions are eliminated, those who have taken advantage of them might not see increased taxes.

“The standard deduction is being doubled. That might help them offset any negative impact they would get potentially from losing their local or state taxes as a deduction,” said Sean Stein Smith, an accounting professor at Rutgers University.

U.S. Rep. Bill Pascrell Jr., a New Jersey Democrat and a member of the House Ways and Means Committee, decried repealing the deduction.

“More than 40 percent of filers in this state use the deduction,” he said in a statement. “I can’t imagine any representative from New Jersey would support inflicting this sort of damage on our middle-class homeowners.”

Trump’s tax plan is in its early stages, and officials stressed on Wednesday that they were working with lawmakers to develop a more detailed version. It is unlikely that the plan will pass unmodified, said Michael Knoll, a tax law professor at the University of Pennsylvania, and there are political pitfalls, too.

“Revenue is the big issue here. It’s going to be a big cut in revenue, if this plan were to go through, and substantially increase the deficit,” he said. “That’s a real concern for a lot of people.”

Trump’s own tax returns – which Treasury Secretary Steve Mnuchin said Wednesday he has no plans to release – could weigh on the political wheeling and dealing ahead.

“When we’re playing peek-a-boo with his taxes, and [it’s unclear] how much he stands to win or not from any of these provisions,” Knoll said, “it just makes it that much politically tougher.”