(Bloomberg) -- The House narrowly adopted a budget resolution, but a lingering obstacle to overhauling the U.S. tax code re-emerged: whether or how to limit a federal tax break that benefits high-tax states including New York and New Jersey.
President Donald Trump and congressional Republican leaders have proposed abolishing the state and local tax deduction -- a prospect that prompted many GOP lawmakers in those states to vote against the budget. It passed, 216-212.
Bank shares reached a decade high after the House vote. The KBW bank index gained as much as 1.2 percent to reach the highest intraday level since November 2007. Bank of America Corp. was up as much as 1.3 percent to the highest level since October 2008, while JPMorgan Chase & Co. rose as much as 1.4 percent to a record high.
The vote set off a sprint to introduce bills in both the House and Senate, consider them in committee and pass them before Thanksgiving. The chambers plan to produce separate bills, and they’d have to be reconciled. House leaders set a Thanksgiving deadline to vote on their version weeks ago, but Senate Majority Whip John Cornyn said Thursday that senators need to meet that schedule as well.
But the protest votes from New York and New Jersey surrounding the so-called SALT deduction reflect the difficult balancing act ahead for tax writers.
“Without a deal, tax reform can’t move forward,” said Representative Tom MacArthur, a New Jersey Republican who joined 19 other GOP House members in voting against the budget. “This isn’t over.”
In a sense, it hasn’t even begun. While House leaders including Majority Whip Steve Scalise and Ways and Means Chairman Kevin Brady pledged to help resolve the SALT impasse, various contentious issues remain.
Brady said after the vote that he plans release a House tax bill by Nov. 1 -- and Cornyn said a Senate version could follow a week later. Releasing the bills will usher in a frenzy of lobbying as various interest groups vie to preserve their favored tax breaks. One example: Brady has hinted that tax writers are considering changes to retirement savings -- putting investment managers on alert.
For the most part, plans for ending various tax breaks -- which are key to helping to offset the deep tax-rate cuts that Trump and congressional leaders want to achieve -- have been kept under wraps.
Now that the budget blueprint has been adopted, a hard reality will set in as the business community and others realize how much of the tax bill will involve closing loopholes and changing their credits and deductions, said Senator Bob Corker, a Republican member of the Senate Budget Committee. He said that will be “80 percent of the work.”
The GOP tax framework calls for doubling the standard deduction for individuals and reducing the current seven income brackets to three -- 12 percent, 25 percent and 35 percent, with a possible fourth bracket for top earners.
The corporate tax rate would be slashed to 20 percent from 35 percent, and pass-through business income -- now taxed at rates as high as 39.6 percent -- would face a top rate of 25 percent.
In the absence of details on how to pay for those rate reductions, the fight over the SALT deduction is instructive. Repealing the tax break would generate an estimated $1.3 trillion over 10 years. If it’s not fully repealed, lawmakers will have another revenue hole to fill.
They can’t afford many such holes: The budget they passed Thursday -- which had already cleared the Senate -- allows for increasing the deficit by $1.5 trillion. House leaders say economic growth stemming from their tax overhaul would help plug that gap. Regardless, Brady and others will be under pressure to preserve every revenue-enhancing provision they can.
Some observers seem to think “we’ve got a $1.5 trillion tax cut that’s taking care of this,” said Corker, who’s pushed for a tax bill not to add to the deficit after reasonable economic growth is taken into account. “Over the next two weeks, especially when the Senate tax-writing committee puts their stuff out, they’re going to realize that this the biggest tax code rewrite since 1986 and it’s going to affect everyone.”
Brady acknowledged Thursday morning that the “no” votes on the budget show that several GOP lawmakers need the SALT issue resolved before they support tax legislation. “We continue to hone through some solutions and what it means for their taxpayers,” he said of the House members who are concerned about the deduction.
House Speaker Paul Ryan referred questions about the deduction to Brady’s Ways and Means panel during a press conference following the budget vote. He stressed that “the entire purpose” of the tax bill will be to cut middle-class taxes.
Ryan didn’t answer a question about rumored changes to retirement savings vehicles, saying the House tax-writing committee should be given “the latitude they need to write their legislation.”
In sidestepping the question, he avoided aligning with Trump, who this week called for making no changes to workers’ 401(k) contributions.
Trump told reporters Wednesday that preserving the 401(k) tax-deferred retirement plans is very important to him. Earlier in the week he said on Twitter that there would be “NO change to your 401(k),” calling the plans a “great and popular” tax break for the middle class.
Brady hasn’t ruled out changes to retirement plans. He said Wednesday that Republicans are “exploring a number of ideas” to "create an incentive for Americans to save more and save sooner."
Senator Rob Portman, a top Republican on the Senate Finance Committee, said that while no final decision has been made, he anticipates that the Senate version of the tax legislation will largely leave intact current tax breaks for 401(k)s.
“I think there’s an understanding that we need to preserve the retirement incentive,” said the Ohio Republican.
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