Disagreement among U.S. congressional Republicans is already swirling around a tax cut plan unveiled days ago by President Donald Trump, who has proposed repealing the tax on inheritances and eliminating a deduction for state and local tax payments.
The discord shows the difficulty of overhauling the complex U.S. tax code. This task has defied Washington since 1986, the last time a comprehensive rewrite was completed despite lobbyists who defend each tax break.
Trump has yet to score a major legislative win since taking office in January and is pushing hard for a tax code revamp. But his plan is meeting the same internal Republican tensions between moderates and conservatives that have sunk his efforts this year to repeal the Obamacare health law.
Another early obstacle is the projected fiscal impact of the plan, which would slash U.S. revenues and expand the federal deficit and the national debt, which now exceeds $20 trillion.
“As challenging as tax legislation is politically, the primary obstacle is math,” Cowen and Co analyst Chris Krueger said in a Friday research note.
“We remain very bearish on any tax legislation passing this year - or next,” Krueger added.
Republican lawmakers from high-tax states such as New York exited meetings this week with Kevin Brady, chairman of the House of Representatives’ tax-writing committee, saying there would be some sort of compromise on repealing the deduction for state and local tax payments.
Separately, some Republican senators were questioning the repeal of a 40 percent inheritance tax levied on estate assets worth more than $5.5 million, or $11 million for married couples. That tax affects only about 0.2 percent of estates, according to the Tax Policy Center, a Washington think tank.
“That is not a priority for me as we seek to craft this tax bill,” Senator Susan Collins, who has often been a key Republican vote, said in a statement on Thursday.
Republicans want to use a procedure known as budget reconciliation to pass eventual tax legislation, which allows passage with a simple majority in the 100-seat Senate. Republicans hold 52 Senate seats and can only afford to lose support from two senators, with Vice President Mike Pence able to cast a tie-breaking vote. Democrats will likely oppose the legislation.
One Republican fiscal hawk, Senator Bob Corker, has already said he cannot support tax legislation that adds to the annual federal deficit.
The Trump plan, made public last week, calls for up to $6 trillion in tax cuts over 10 years. Without accompanying spending reductions, the budget would hugely expand the deficit, according to some estimates.
The administration contends tax cuts would spur so much economic growth that the resulting new revenues would help offset the cost.
In addition, Republicans are proposing “revenue raisers,” such as ending the deduction for payments of state and local tax, known as SALT. Doing that would raise about $1.3 trillion over a decade, the Tax Policy Center said.
Almost 30 percent of taxpayers currently deduct state and local taxes. In New Jersey, for example, 41 percent of tax filers, meaning individuals or married couples, claimed the deduction, which averaged $17,850, according to a Government Finance Officers Association analysis of Internal Revenue Service data.
Although the deduction disproportionately benefits people in high-tax states and localities, individuals in all states claim it. In Georgia, for example, 33 percent of tax filers claim an average deduction of $9,158, the report said.
Republican Representative Chris Collins of New York, a Trump ally, told reporters earlier this week that lawmakers from high-tax states, such as his own, were discussing “ways to level the playing field,” including capping the amount of the deduction or putting other limits on it.
“There are many districts with Republican members where state and local deduction is used by a large portion of the taxpayers,” said Frank Sammartino, a senior fellow at the Tax Policy Center. “So it’s not surprising that it’s not strictly a blue state/red state thing.”
Senate Democratic leader Chuck Schumer called the state and local tax deduction the “Achilles’ heel” of tax reform and said his party would oppose any move to repeal it. He dismissed compromise plans as unfeasible.
Brady said on Thursday that at this point there has been no change to the framework, but tax writers are “listening very carefully” to lawmakers’ concerns.
“It’s got to be frustrating when you’re in a state where local and state officials really put the screws to taxpayers,” Brady told reporters. “We are determined to provide tax relief to every American, regardless of where they live.”