The Finance 202: House GOP may cap state and local tax deduction amid outcry from moderates

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THE TICKER

Facing a revolt from blue-state Republicans, House GOP leaders are considering scaling back their proposed repeal of the state and local tax deductions.

Ending the break raises an estimated $1.3 trillion to help pay for the party’s tax code overhaul. But that would also cost the project a potentially decisive margin of Republican votes from states such as New Jersey, New York and Pennsylvania, where residents who rely on the deduction would see their tax burden spike. 

Although the White House included a proposed repeal in its tax framework in April, President Trump learned only recently that it would pinch some middle-income taxpayers. It angered him, Bloomberg News reports, and he insisted this week that Republicans are “adjusting” the plan. That aligns him with congressional Republicans from two of his home states and beyond, who on Thursday pressed their case with House Ways and Means Chairman Kevin Brady (R-Tex.). 

“No decisions have been reached or anywhere close to it, but we’re having a really healthy discussion,” Brady told reporters Thursday. Republicans from high-tax states who huddled with him expressed some encouragement that they will fend off a full repeal of the deduction, instead probably imposing a cap so all but higher-income earners can continue to claim it.  

Depending on where Republicans draw the line, that could cut deeply into one of the few revenue sources that congressional Republicans have identified to pay for an estimated $5 trillion in cuts they’d like to make. From The Wall Street Journal’s Richard Rubin and Siobhan Hughes: “For real estate taxes, households with income over $200,000 make up 18% of those who claim the deduction but get 40% of the overall benefit, according to the congressional Joint Committee on Taxation. The deduction for income and sales taxes is even more concentrated among high-income households, with 71% of the benefit going to those above $200,000 in income. Taken together, that suggests that a $200,000 line could cut the revenue from repeal roughly in half.”

Republicans from states that stand to get hit the hardest told my colleague Mike DeBonis on Thursday that they hadn’t  decided who, for the purposes of the deduction, should count as middle class. “It is different in every one of our districts,” Rep. Lee Zeldin (R-N.Y.) said. In his district — the eastern half of Long Island, including the Hamptons — he estimated that “the high end of that range, conservatively, I would say is maybe somewhere in the 3s,” he said, meaning those earning $300,000 to $400,000 a year. Zeldin said he wants his constituents to be able to enter their income into an online calculator to confirm “that a net result of our bill is … them being able to keep more of their paycheck.”
 

Rep. Tom MacArthur (R-N.J.) isn’t drawing red lines. “I’m not fixated on one solution,” he said. “I’m fixated on making sure that the people of my state don’t finance tax benefits elsewhere.” Hailing from two districts to the north, Rep. Leonard Lance (R-N.J.) sounds less willing to deal. “I favor retention of SALT in its entirety,” he told DeBonis on Thursday, using the deduction’s acronym. “The last time we had major tax reform in this country it was on the table, but it was eventually taken off the table.”

This is familiar territory for Republicans. House GOP leaders spent the first half of the year trying to sell their rank-and-file on a border adjustment tax that would have raised an estimated $1 trillion to help finance lower overall rates. The idea met stiff resistance on and off Capitol Hill. The Koch political network — along with big-box retailers and others — waged a lobbying campaign against the proposal that was so fierce, proponents privately griped that it would sink the entire project. 

Now, the National Association of Realtors finds itself among those objecting to the new shape of the Republican tax plan, including the repeal of SALT. And in a sign of how the worm has turned, the Kochs this week launched a campaign naming the group as among those spending millions of dollars to protect their own interests, jeopardizing the overhaul in the process. 

We’ve seen that lobbyists from a range of industries have their long knives out for another source of money Republicans hope to tap — ending the deduction for interest on business debt. And they’ve recruited a different set of Republican lawmakers to demand carve-outs. 

Time is getting short for GOP brass to work through the thicket of resistance and emerge with revenue meaningful enough to meet their lofty ambitions.

The Republicans pushing back against SALT repeal on Thursday reflected their leadership’s urgency. “We’ve got to move as soon as the Senate passes a budget,” MacArthur said, pointing to a milestone their counterparts in the upper chamber hope to achieve next week. Asked how quickly leaders hope to find a solution on the state and local break, Rep. John Faso (R-N.Y.) said, “They’re working hard.”

MARKET MOVERS

Trump interviews Taylor. The president on Wednesday interviewed Stanford economist John Taylor as he nears a decision on a pick for Fed chair. The Wall Street Journal’s Kate Davidson and Peter Nicholas: “Mr. Taylor has criticized the central bank’s easy-money stimulus policies since the financial crisis and pushed for the adoption of a mathematical formula to guide the Fed’s interest-rate decisions. The president met late last month with former Fed governor Kevin Warsh and current Fed governor Jerome Powell to discuss the job. Janet Yellen, whose four-year term as Fed chairwoman expires in early February, is also among the final contenders, according to people familiar with the matter.”

Meet John Taylor. The Wall Street Journal’s David Harrison: “Mr. Taylor is perhaps best known for his ‘Taylor Rule,’ first spelled out in 1993, that he says provides a mathematical formula to set the proper level of interest rates. The rule relies on the gap between actual inflation and output and their targeted levels as well as on the interest rates that would perfectly match the supply of and demand for credit. Central bankers have long used the rule as a benchmark against which to measure their own policy but they’ve been hesitant to bind themselves to it. During the long recovery from the financial crisis and the recession, the rule would have called for considerably higher interest rates than the Fed put in place.”

The Final Four: Taylor, Janet Yellen, Jerome Powell, and Kevin Warsh. PredictIt now has Powell in the lead, followed by Warsh, Taylor, and Yellen, in that order. 

TAX FLY-AROUND: 

— House Speaker Paul Ryan (R-Wis.) defends SALT repeal. CNN’s Ashley Killough: “Ryan, who was asked about it in a Heritage Foundation Forum in Washington, described the issue as ‘the thing we have to get over.’ ‘The general interest is going to have to trump over the special interest,’ the Wisconsin Republican said.”

Grassley to Trump: You’re wrong on taxes. Washington Examiner’s Joseph Lawler: “Iowa Republican Sen. Chuck Grassley issued his own fact-check of President Trump Thursday, challenging his claims that his planned tax cut would be the biggest in U.S. history. In fact, Grassley claimed, the Bush tax cuts that he helped pass in 2001 were bigger. Adjusted for inflation, the former Senate Finance Chairman claimed, the 2001 tax bill was a $1.87 trillion cut. Currently, the Senate is working toward a budget that would limit Trump’s tax cuts to $1.5 trillion, although that could be changed.”

Economists split on tax cut impact. They agree cuts would unleash short-term growth, but they’re split on what they would mean over the long haul. The Wall Street Journal’s Ben Leubsdorf: “An overwhelming majority of forecasters in The Wall Street Journal’s monthly survey of economists said the GOP tax plan unveiled last month would, if implemented, raise the growth rate for U.S. gross domestic product over the next two years. Some 60% saw a modest lift to output compared with its current trend, while 27% said the annual growth rate would jump by more than half a percentage point…

But roughly half of the economists said any growth spurt would fade over time. Asked about the tax plan’s likely effect on the economy’s long-run growth rate, 48% predicted a modest increase while 38% said the U.S. would remain on its current trajectory. Just 4% said the tax plan would boost the GDP growth rate by more than 0.5 percentage point a year, while 10% said growth would be slower than if there had been no tax changes.”

TRUMP TRACKER

Mnuchin won’t fill Treasury’s No. 2 slot. Politico’s Lorraine Woellert: “The department made the surprising announcement after Brian Brooks withdrew from consideration for deputy Treasury secretary, according to several people familiar with his decision. In May, Goldman Sachs executive Jim Donovan dropped out due to family concerns. The deputy secretary plays a pivotal role in tax reform, housing policy and other top agenda issues… President Donald Trump hadn’t formally nominated Brooks to the deputy secretary post, but the job was widely reported to be his. Brooks, an executive vice president and general counsel at Fannie Mae, had worked with Mnuchin at OneWest, a California bank built from the ashes of the foreclosure collapse.”

Here was Mnuchin meeting the Bahraini foreign minister. The pleasure appears to have been nobody’s: 

This is the dashboard tracking Trump’s Senate-confirmed appointments so far, and how they stack up against previous presidents at this point in his term. He’s lagging badly behind, with about half the number of his people in place as his predecessors. Earlier this week, Trump told Forbes that he didn’t intend to fill many of the open positions. “I’m generally not going to make a lot of the appointments that would normally be — because you don’t need them,” he said. “I mean, you look at some of these agencies, how massive they are, and it’s totally unnecessary. They have hundreds of thousands of people.” That’s like saying an 18-wheeler already weighs too much, so it doesn’t need a steering wheel. 

Kevin Hassett’s new life. The Post’s Damian Paletta interviews the president’s newly-minted top economist less than a month after he took the job, as he’s launched himself into the work of selling Trump’s plan to slash the corporate tax rate. “My job is to provide objective analysis to the president — and really to the public — about important economic policy issues,” Hassett tells Damian.

More from the story: “This will include pushing back when he thinks outside economists are mischaracterizing a White House proposal. He said he will provide Trump and the public with a range of outcomes from different economic proposals while also trying to ‘guide people into thinking what the right answer is.’ It hasn’t taken long for critics of Hassett’s new role to pounce. Former treasury secretary Lawrence Summers on Thursday called some of Hassett’s assertions about wage growth tied to corporate tax cuts ‘ludicrous.’ ‘I think it’s an absurdity,’ Summers said on CNBC.”

In the 21 months since a landmark nuclear agreement freed Iran’s economy from crippling economic sanctions, investors eager to tap the country’s energy reserves and its 80 million consumers have waited for signs it was safe to enter the market in full force.

Bloomberg

POCKET CHANGE

MONEY ON THE HILL

House approves disaster relief. The $36.5 billion package includes funds for hurricane and wildfire victims — plus credit for Puerto Rico’s government so it can continue to function through its ongoing emergency. “The 353-69 vote came hours after President Donald Trump questioned in Twitter posts how long the federal commitment to the island should last and suggested that Puerto Rico had mismanaged its finances. Congressional leaders of both political parties defended the need to send resources to the U.S. territory, which was devastated by two hurricanes this summer,” The Wall Street Journal’s Kristina Peterson and Natalie Andrews write. “Most of the island still lacks electric power and there is limited access to health care and other basic needs.”

Equifax spurs credit bureau reform. “Top congressional Republicans on Thursday made the first significant moves to boost federal oversight at credit-reporting firms in response to the massive hack disclosed by Equifax Inc. last month,” The Wall Street Journal’s Andrew Ackerman reports. “Rep. Patrick McHenry of North Carolina introduced a bill to require the three major credit firms—Equifax, Experian PLC and TransUnion—to submit to regular federal cybersecurity reviews for the first time. All three companies also would have to phase out their use of Social Security numbers to verify consumers’ identities by 2020. Mr. McHenry’s sponsorship of the legislation is significant. As a deputy GOP whip, he holds significant sway among House Republicans. The bill is an important starting point for the House Financial Services Committee as it considers a legislative response.”

Meanwhile, Senate Banking Committee Chairman Mike Crapo (R-Idaho) is asking banking regulators if they need more power to oversee Equifax and its ilk

CHART TOPPER

From The Post’s Aaron Blake: “Trump’s numbers on Puerto Rico are worse than Bush’s post-Katrina:” 

DAYBOOK

Today

  • The FDIC hosts its 7th annual consumer research symposium.

  • The Brookings Institution is hosting an event on regional development banks.

THE FUNNIES

From The Post’s Tom Toles: “Scott Pruitt pairs an exquisite gift of bad timing with egregious policy.” 

BULL SESSION

Why Trump isn’t the first president to threaten FCC licenses:

Trump’s 10 softest interviews as president, ranked:

Here’s how the 25th Amendment works:

Watch Stephen Colbert’s interview of Sean Hannity’s interview of Trump:

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