Education

State Tax Deductions Seen At Risk in Senate Plan

By J. R. Sirkin — July 09, 2019 2 min read

Washington

The question of whether the Senate would move to set limits on the deductibility of state and local taxes was a subject of intense speculation on Capitol Hill last week, as lawmakers moved closer to marking up a tax-reform bill.

Despite pressure from senators who want to focus on the federal budget deficit, Sen. Bob Packwood of Oregon, the Republican chairman of the Finance Committee, was trying to line up support for a draft committee bill that reportedly includes several options for restricting such deductions on federal income-tax returns.

The draft bill also reportedly loosens pension-plan restrictions that were included in the House-approved tax-reform measure.

Markup of the committee bill is scheduled to begin next week.

Retention of the deductions for state and local taxes is a top legislative priority for education groups. They argue that the elimination or curtailment of the deductions would force state and local governments to raise taxes or reduce services.

State and local governments generally provide more than 90 percent of the funds for public schools.

The House bill retains the full deductibility of state and local taxes.

All indications last week suggested that the Finance Committee would include some restrictions on deductibility in its bill.

“We’re ahead at half-time, but we’re expecting a rough third and fourth quarter,” said Bob Chlopak, executive director of the Coalition Against Double Taxation, a group that strongly supports current deductibility provisions.

In the Senate, tax reform—which the Reagan Administration wants to be “revenue-neutral"—appears to have gotten caught up in the debate over ways to reduce the deficit. The Senate’s finance and budget panels have been sparring over how any possible tax increases would be used.

Tax reformers have been hoping to pick up new revenues to pay for adjustments in the tax bill that President Reagan promised to House Republicans earlier this year to secure their support for the House Ways and Means Committee bill.

Although the Finance Committee staff apparently has rejected the idea of limiting personal-income-tax deductions to subsidize tax breaks for businesses, its draft would reportedly raise the personal exemption and the standard deduction, creating a need for new revenues.

If any new revenues are applied to the deficit instead of to tax reform, the deductions of state and local taxes could be restricted to pick up the slack in the reform bill.

Senator Packwood has already publicly endorsed the idea of limiting the deductions for state and local sales taxes. His home state, Oregon, does not levy a sales tax.

Mr. Packwood’s proposal elicited a counterproposal from Sen. Russell B. Long of Louisiana-a state that depends heavily on sales taxes. Senator Long, the ranking minority member on the finance panel, recommended restricting deductions of all state and local taxes to amounts that exceed 3 percent of an individual’s adjusted gross income.

The Treasury Department has suggested several possible limits on deductibility as a means of reaching the Administration’s tax-reform goals, including:

  • Repealing the sales-tax deduction.
  • Repealing the personal-property-tax deduction.
  • Restricting deductions to amounts that exceed 1 percent of an individual’s adjusted gross income.
  • Limiting deductions to no more than 6.5 percent of adjusted gross income.

A version of this article appeared in the March 12, 1986 edition of Education Week

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