The Republican-controlled House passed a $1.5-trillion tax reform package – the largest tax cut for the middle class in more than a generation.

The vote was 227-205, with 13 Republicans voting against the measure.

Twelve of thirteen GOP opponents of the tax bill hail from high-tax states – New York (5), New Jersey (4), and California (3).  Walter Jones of North Carolina also voted against the bill.

Big-state Republicans are objecting to the elimination of the deduction for state and local taxes, which the GOP leadership has been insisting is necessary to offset some of the cost of tax reform.

The issue may prove to be a deal-breaker in the Senate, where the bill is already on the knife's edge of defeat.  Also, there are other offsets that are potential land mines to get tax reform passed in the Senate.

Hit and Run:

The House plan cuts taxes by roughly $1.5 trillion over the next decade, with tax reductions for both businesses and individuals. The plan would slash the corporate tax rate from 35 percent down to 20 percent, and would condense the current seven individual income tax brackets into four while expanding the child tax credit and doubling the standard deduction.

The lower corporate tax rate would be a permanent change. However, a new $300 tax credit dubbed the "family flexibility credit" that is intended to help middle [sic] would expire in 2023, leading one analysis to find that, after that year, only 40 percent of Americans would pay lower taxes under the plan – and 22 percent would pay more.

The House legislation also reduces or eliminates many major deductions, including carve outs for medical expenses, cars, moving, tax preparation, and student loan interest. The plan gets rid of the state and local tax deduction for income and sales tax would be eliminated, and caps the deduction for property taxes.

That deduction provides the biggest benefit to residents of high-income, high-tax states that tend to vote Democratic – hence the handful of GOP blue state defectors. Unlike the revised Senate tax plan that was released earlier in the week, it does not repeal Obamacare's individual mandate to purchase health coverage.

There will almost certainly be an effort in 2023 to keep that $300 tax credit for families.  It seems preposterous that Congress would allow it to expire.

In fact, by eliminating the tax credit after 5 years, Republicans were able to reduce the potential deficit – on paper – by several hundred billion dollars. This is important because if the projected deficit in the bill exceeds $1.5 trillion over a decade, it would trigger a reconciliation vote in the Senate that would require 60 members to pass.

So it is likely that the $300-per-year tax credit per individual will stay.

But the real sticking point in the Senate may be the elimination of state and local tax deductions.  In high-tax states and communities, the loss would be significant.

Reuters:

The proposed repeal of the state and local tax (SALT) deduction is part of an "assault on local governments" by Republicans in Washington, said Elizabeth Kautz, the Republican mayor of Burnsville, Minnesota, near Minneapolis.

"My hope is that we look at being thoughtful about what we're doing and not ram something through just to get something done before the year is out," Kautz said of the plan being rushed through Congress by her own party.

In the United States, local governments run schools, operate police and fire departments and maintain streets, parks and libraries, among other essential services. The federal government's role at that level is limited.

Cities, towns, counties and states collect their own property, sales and income taxes. Under existing law, payments of those taxes can be deducted, or subtracted from federal taxable income, lowering the amount of federal tax due.

The House tax bill just approved would eliminate the deduction for individuals and families of state and local income and sales tax, while capping property tax deductions at $10,000.

In every effort to reform the tax code, there are winners and losers.  This is especially true when looking at tax reform that's this big and complex.  Sometimes the winners win big and the losers lose big.  In the end, it's a matter of juggling competing interests to arrive at an endpoint that a majority of Congress can support.

Coming from a high-tax state myself, the elimination of the tax write-off for state and local taxes would increase my tax bill under the old rules by about 10%.  Most of that will be offset by the family tax credit and the lowering of my overall tax rate.  In the end, my guess is that I will break about even on tax reform.

But most Americans will see a significant reduction in their tax rates, which, if passed by the Senate, fulfills Donald Trump's most important campaign promise to the American people.