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U.S. President Donald Trump speaks about tax reform in Harrisburg, Pennsylvania, U.S., October 11, 2017. REUTERS/Joshua Ro...

A major sticking point in the Republican tax plan, explained

The state and local tax deduction has become a key sticking point for Republicans negotiating tax reform. How the tax break gets handled will help determine the final price tag of the tax legislation Republicans hope to pass by the end of the year.

The White House has called for eliminating the tax break, known as “SALT,” to help pay for the personal and business tax cuts President Donald Trump promised. But some House Republicans are pushing to keep a version of the deduction in place. The debate is the latest chapter in a decades-long fight between supporters who say the tax break helps middle-class taxpayers, and critics who claim it’s a costly federal subsidy.

Here is a guide to the state and local deduction, and what might happen if it gets tweaked or eliminated altogether.

How SALT works

The current tax code allows individuals and households who itemize deductions to deduct state and local real estate and personal property taxes from their federal returns. Taxpayers can also deduct either state and local income taxes or sales taxes. Most people choose to itemize their state and local income and real estate taxes, which combined account for 95 percent of all SALT deductions.

Who takes the deduction?

The vast majority of people who receive the state and local tax break are high-income earners. In 2014, 81 percent of all SALT deductions were claimed by people earning $100,000 or more, according to data from the Tax Policy Center. Just 10 percent of all state and local deductions were claimed by taxpayers earning less than $50,000.

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Wealthier people also claim larger state and local deductions. The average claim by people earning between $100,000 and $200,000 in 2014 was $11,000. In contrast, the average claim that year by taxpayers earning between $20,000 and $50,000 was just $3,800. Most of the federally-funded tax break flows to middle- and upper-middle-class earners in states with high state and local income and real estate taxes. In 2014, taxpayers in New York state claimed the largest average state and local deduction, at $21,000, followed by Connecticut ($18,900), New Jersey ($17,200), and California ($17,100).

Far fewer people would choose to itemize deductions — including their state and local taxes — under the current White House tax plan, because it would significantly increase the standard deduction for individuals and married couples who file jointly.

How much does this tax break cost the federal government?

The Treasury Department estimated last year that the federal government would spend $783 billion on state and local income tax deductions between 2016 and 2026. A full repeal of the tax break — which would include scrapping the deductions for state and local real estate, personal property and sales taxes — would raise $1.3 trillion over the next decade, the Tax Policy Center found.

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Eliminating the SALT deduction would generate the second-largest source of revenue under the tax proposal the White House and Republican leaders put out last month. The largest source of revenue, nearly $1.6 trillion, would come from eliminating personal exemptions. Overall, the tax plan, which included a full SALT repeal, would cost $2.4 trillion over 10 years, according to the nonpartisan Tax Policy Center.

Getting rid of the state and local tax deduction is “one of the biggest revenue increasers” in the current plan, Frank Sammartino, a senior fellow at the Tax Policy Center, said. “If it’s not part of the package, it’s hard to see where they make that up.”

Different approaches

House Republicans are reportedly considering a proposal to keep the SALT deduction in place for taxpayers with incomes of up to $400,000, though the final cap could be closer to $250,000. That would add hundreds of billions to the deficit over 10 years, depending on the cap, unless lawmakers found another way to offset the cost.

Senate Republicans have sent mixed signals on the tax break. After the White House rolled out its “unified framework” on tax reform last month, Senate Finance Chairman Orrin Hatch, R-Utah, who helped craft the framework, said he wanted to leave the SALT deductions unchanged. But last week, Sen. Tim Scott, R-S.C., said the Senate Finance Committee’s tax legislation would likely include a provision fully eliminating the state and local tax break.

Why the politics are so tricky

The people who benefit most from the state and local deduction are high-income earners in blue states like New York and California. But many live in wealthy congressional districts represented by Republicans. GOP lawmakers represent 45 percent of the 20 House districts with the highest percentage of SALT claims. That’s why some House Republicans with constituents who benefit from the tax break, like Rep. Peter King, R-N.Y., have opposed getting rid of it. Senate Minority Leader Chuck Schumer, D-N.Y., has also come out strongly against the proposal.

“It’s kind of discouraging that some people on the Hill are trying to keep part of the break,” said Rachel Greszler, a tax expert at the conservative Heritage Foundation. “Regardless of who benefits and who loses, it’s a bad policy.”

The White House has insisted on a full repeal of the deduction, but it’s possible Mr. Trump would accept a compromise if House and Senate Republicans can reach a deal. A full repeal would be a victory for opponents who have called for eliminating the state and local tax break for years. Republicans considered eliminating the deduction in 1986, when Congress last passed a major tax overhaul, but the proposal was left out of the final law.