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- The House GOP tax bill is set to be approved by the Ways and Means Committee on Thursday. A lingering question had remained over whether state and local taxes could still be deducted by “pass-through” entities under the legislation. The discrepancy in answers from the Ways and Means Committee and the Joint Committee on Taxation appears to have been resolved with a letter from Rep. Kevin Brady.
House Ways and Means Chair Kevin Brady clarified the House Republican tax bill’s position on pass-through entities and the state and local tax deduction in a letter to Democratic Rep. Earl Blumenauer obtained by The Wall Street Journal.
According to the letter, owners of pass-through businesses who take companies’ profits as personal income are not allowed to deduct state and local taxes from their federal tax bill, as corporations can. Instead, they are limited to the same deductions as individuals.
“State and local income taxes paid by an individual owner of such a business would not be deductible on the individual’s tax return,” Brady’s letter reportedly said.
This seems to coincide with the Joint Committee on Taxation’s assessment of the law rather than the original assessment of the Ways and Means staff.
Earlier, a discrepancy in the bill’s interpretation of the state and local tax deduction inflamed a conflict between Democrats and the Republican leaders of House Ways and Means Committee. At stake was possibly hundreds of billions of dollars in tax revenue, and Republicans stonewalled on an answer for days.
At issue was the question of whether pass-through entities – small businesses such as limited-liability corporations and S-corporations in which the owners bank the profits – could still deduct their state and local taxes from their federal tax bill under the House GOP plan.
Everyone agreed that corporations could still deduct state and local taxes as a business expense under the plan, the Tax Cuts and Jobs Act. Everyone also agreed that individuals are limited to a deduction of $10,000 in property taxes but can’t deduct sales or income taxes.
But where those pass-through entities lay was not clear.
A House Ways and Means Committee representative said 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 $1.5 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 said the Joint Committee on Taxation was most likely assuming that some investors or accounting-firm owners would not be able to take the deduction because of 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 math 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 Barthold’s statement was probably correct.
In the end, it appears that Barthold’s interpretations was correct, and the restrictions did apply to these pass-through businesses.