WASHINGTON — Republicans straining to find about $1 trillion to finance sweeping tax cuts are homing in on two popular deductions that are woven into the nation’s fiscal fabric — the mortgage interest deduction that millions of homeowners prize and the deduction for state and local taxes popular in Democratic strongholds.
About 30 million Americans, or about 20 percent of taxpayers, deduct mortgage interest from their income taxes, a deduction Realtors and homebuilders argue is a catalyst to home ownership in the United States. According to the most recent IRS tally, nearly 44 million people claim the deduction for state and local taxes in 2014, especially in the high-tax, high-income states of California, New York, New Jersey and Connecticut.
Republicans are determined to overhaul the nation’s tax code after more than three decades, delivering on a top legislative priority for President Donald Trump. Highlighting items that have been modernized since 1986, the last year the tax code was overhauled. Speaker Paul Ryan, R-Wis., made a pitch for reform, saying on Monday, “Just like the rotary phone of the ’80s, the American tax code is seriously outdated.”
The two deductions are in the crosshairs as Republicans look to slash the corporate and individual tax rates, according to congressional aides and strong hints from some lawmakers. The deductions point up how what’s seen by some as a special-deal loophole is embraced by others as a revered middle-class touchstone. That’s a major reason why an overhaul of the tax system — a political imperative for the GOP — is so difficult.
House Republicans, who have been working behind closed doors, are promising to reveal details of their plan next week.
The Trump administration has thrown its weight behind a revamp of the tax system, but Republicans are split on some core issues.
They are divided over whether to add to the nation’s soaring debt with tax cuts. In the Senate, Orrin Hatch, R-Utah, who heads the tax-writing Finance Committee, says his panel won’t be “a rubber stamp” for the House Republicans’ plan. The GOP is at odds over eliminating the deduction for state and local taxes.
There are plenty of GOP lawmakers in Democratic-controlled New York, Connecticut, New Jersey and California, and they’re pushing back. A coalition of 70 lawmakers from blue states — including 20 Republicans — lodged their objection formally to Treasury Secretary Steven Mnuchin.
Repealing the state-local deduction for federal income taxes would subject people to being taxed twice, they say.
The administration wants the state and local deduction to be eliminated or reduced because, officials say, the federal government shouldn’t be subsidizing states and wealthy households.
The federal deduction for state and local taxes along with the mortgage interest deduction cost the government dearly in lost potential revenue. The state and local benefit, one of the biggest, deprives federal coffers of an estimated $1.3 trillion to $2 trillion over 10 years.
Governors and mayors, as well as big companies that pay state and local property taxes, could coalesce into a potent lobbying force defending the deduction.
The same knock is made by critics against the mortgage interest deduction: that it favors wealthy taxpayers at the expense of people of modest means. The benefit allows homeowners to deduct interest on up to $1 million in mortgage debt. Only about 20 percent of taxpayers deduct mortgage interest from their income taxes. It’s open only to those who itemize deductions, and those taxpayers tend to have higher incomes.
The mortgage interest deduction, costing about $700 billion over a decade, is held up as a booster of homeownership and economic advancement.