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1 1 (November 14, 2017)

handle is hein.crs/govcgur0001 and id is 1 raw text is: 01;0i E.$~ & Updated November 14, 2017 Key Issues in Tax Reform: the Deduction for State and Local Taxes A key component of tax reform proposals is their treatment of federal tax expenditures or revenue losses attributable to provisions that adjust income taxes away from a theoretically normal tax system. Tax reform proposals in the 115th Congress include modifications to the federal deduction for state and local taxes, which is among the largest tax expenditures in the federal income tax system. Debate over modifications to the current state and local tax deduction includes discussion of issues related to the interaction between federal, state, and local governments, along with the distribution of the total tax burden across jurisdictions and households. Generally, taxpayers may deduct state and local taxes paid from income when filing a federal tax return. Individual taxpayers must itemize deductions (rather than use the standard deduction) on their income tax return to claim the deduction for state and local taxes paid. The federal tax savings from the deduction on state and local taxes paid is equal to the taxpayer's marginal tax rate multiplied by the size of the deduction. Table I. Number and Percentage of Returns with State and Local Tax Deductions, Tax Year 2015 (return numbers in millions, percentages of all returns) Return Type Number % All Returns 150.5 100 Returns with Standard Deduction 105.9 70.4 Returns with Itemized Deductions 44.6 29.6 Returns with deductions for. Any State and Local Tax 42.7 28.4 Real Property Taxes 37.6 25.0 Income Taxes 33.1 22.0 Personal Property Taxes 18.9 12.5 Sales Taxes 9.6 6.4 Other State and Local Taxes 2.7 1.8 Source: U.S. Department of the Treasury, Internal Revenue Service, Statistics of Income Division, Individual Income Tax Returns, various years, Publication 1304. Qualifying taxpayers may claim deductions for state and local real estate taxes, personal property taxes, income taxes, and sales taxes (in lieu of income taxes) from federal income when calculating taxable income. The rate of most deductions is reduced for taxpayers with adjusted gross income above certain thresholds ($313,800 for married taxpayers filing jointly and $261,500 for single filers in 2017). Internal Revenue Service (IRS) data indicate that of the 44.6 million taxpayers who itemized deductions in 2015, 42.7 million (or 95.8% of itemizers) claimed deductions for state and local taxes paid. Table 1 shows 2015 state and local deduction claim levels and rates as a percentage of all tax returns. A December 2016 estimate from the Joint Committee on Taxation (JCT) projected that under current law, the federal deduction for state and local taxes would reduce revenues by $548.8 billion from FY2016 to FY2020. Deductions for income taxes, sales taxes, and personal property taxes were estimated to reduce revenues by $368.8 billion, while deductions for real property taxes were projected to reduce revenues by $180.0 billion over the five-year period. beg-' anuh,,e 'A , ,r',-,u The federal income tax deduction for state and local taxes paid originates from the Revenue Act of 1913, which allowed the deduction for all national, State, county, school and municipal taxes paid within the year, not including those assessed against local benefits. There were frequent modifications to the deductibility provision over the years, including the introduction of a sales tax deduction in 1932, the introduction of the standard deduction in 1944, and the restriction of deductions to taxes explicitly mentioned in statute in 1964. Recent changes include repeal of the deduction for sales taxes by the Tax Reform Act of 1986 (P.L. 99-514), temporary instatement of a deduction for sales taxes in lieu of income taxes by the American Jobs Creation Act of 2004 (AJCA 2004, P.L. 108-357), and permanent incorporation of the sales taxes deduction in lieu of income taxes by the Consolidated Appropriations Act, 2016 (P.L. 114-113). Repeal of the federal deduction for state and local taxes is under consideration as part of tax reform proposals in the 115th Congress. H.R. 1, as reported by the Committee on Ways and Means, would repeal the deductions for state and local income and sales taxes paid. H.R. 1 would also limit individual claims on state and local property taxes paid to $10,000. That modification would not apply to taxes paid or accrued in carrying on a trade or business. Conversely, the Senate Finance Committee chairman's mark to the Tax Cuts and Jobs Act as scheduled for markup the week of November 13, 2017, would repeal all deductions for state and local taxes paid for individuals while retaining the deductions for taxes paid or accrued in carrying on a trade or business. p\w gnom ggmm mppm qq\ a , q 'S I 11LINUALiN,

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