There's a lingering question about the GOP tax plan, and 'hundreds of billions of dollars' could be at stake

Kevin bradyChip Somodevilla/Getty ImagesHouse and Means Chair Kevin Brady
  • The House GOP tax bill is set to be approved by the Ways and Means Committee on Thursday.
  • A lingering question remains over whether state and local taxes could still be deducted by “pass-through” entities under the legislation.
  • There is a discrepancy in answers from the Ways and Means Committee and the Joint Committee on Taxation.

The House GOP tax bill has a bit of a mystery on its hands as it looks set to be approved by the chamber’s tax-writing committee on Thursday.

A discrepancy in the bill’s interpretation of the state and local tax deduction has inflamed a conflict between Democrats and the Republican leaders of House Ways and Means Committee. At stake is possibly hundreds of billions of dollars in tax revenue.

At issue is the ability of pass-through entities — small businesses such as limited-liability corporations and S-corporations where the owners bank the profits — could still deduct their state and local taxes from their federal tax bill under the House GOP plan.

Everyone agrees that under the plan, the Tax Cuts and Jobs Act (TCJA), corporations could still deduct state and local taxes as a business expense. Everyone also agrees that individuals are limited to a deduction of $US10,000 in property taxes but can’t deduct sales or income taxes.

But where those pass-through entities lie is not clear.

A House Ways and Means committee spokesperson said that all pass-through entities would be allowed to take the deduction. But Tom Barthold, a representative for the Joint Committee on Taxation present at the committee’s markup, said that based on pass-through restrictions in the legislation, some of these entities would not be able to take the deduction.

David Kamin, a New York University law professor who spotted the issue early, said resolving the discrepancy could be key to figuring out a hundred-billion-dollar question.

“At issue is likely hundreds of billions of dollars of revenue from some of the highest income Americans, and so a bill which is intended to cost $US1.5 trillion might actually cost significantly more than that and be more regressive than is now estimated,” Kamin said in a blog post Thursday. “Either the text of the legislation should probably change or the revenue and distributional estimates probably should.”

Kamin explained that the Joint Committee on Taxation is likely assuming that some investors or accounting-firm owners would not be able to take the deduction due to limitations on pass-through entities in the House legislation. If Ways and Means is attempting to allow all pass-throughs to take the deduction and the JCT did not factor that in, he said, that would result in much more revenue lost and a bigger maths problem for the legislation.

On the other hand, if the restrictions were designed to prevent pass-through entities like hedge funds and accounting firms from getting the deduction, then JCT’s Barthold’s statement is likely correct.

Despite what has so far been daily demand by Democratic Rep. Earl Blumenauer to clarify the issue, it has so far not been resolved.

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