Why Trump may eliminate a tax deduction claimed by millions

Tax reform may have moved to the back burner for the Trump administration, but that doesn't mean that people in the executive branch aren't thinking about it. One of the big ideas reportedly getting its turn in the sun is repeal of the federal income tax deduction for state and local taxes.

According to Axios, the idea is gaining currency with Gary Cohn, the former head of Goldman Sachs who now serves as President Trump's top economic adviser.

Related: The Best and Worst States for Taxes in 2017

One of the reasons it is looking attractive is that the Trump administration and its allies in Congress are determined to slash income tax rates on both businesses and individuals but need to find a way to replace lost revenue. A way to do that is to go after "tax expenditures" -- exceptions and allowances that reduce taxes that individuals and businesses would otherwise owe.

The state and local tax deduction is one of the largest tax expenditures on the books. It allows taxpayers to deduct taxes paid to states and municipalities -- primarily income and personal property taxes, but also sales tax in some cases -- from their federal tax bills. It will cost the Treasury an estimated $97 billion in 2017 and $1.3 trillion over the next 10 years.

RELATED: Common thoughts we all have when filing our taxes:

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10 things we've all said while filing our taxes
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10 things we've all said while filing our taxes

"It's only January, I have plenty of time!"
You're relaxed, you're casual, what even are taxes anyway? You don't care! It's so far away that filing taxes isn't even remotely on your radar, to be honest.

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"The imminent act of filing is upon me and I literally have nothing ready..."
Tax season is now approaching and that creeping anxiety about getting everything done on time is starting to set in. It's essentially biting at your heels and you know you have to get moving.

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No words. Just emotional paralysis.
You're screwed. You need to start doing your paperwork but you physically do not know where to even begin. It's time. It's happening.

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"I HAVE A MILLION THINGS I NEED TO DO, WHY ARE THERE SO MANY PAPERS AND QUESTIONS, SOMEBODY HELP ME!"
That anxiety you felt creeping in earlier? Now it's full-fledged onset. This stage is often accompanied by screaming out loud, pulling hair, crying, etc.

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"Wait, did I get all of my papers in? Did I check that one box correctly? Does it look like I'm trying to evade some of these taxes? What if I go to jail? Can I go to jail for that? WHO WILL FEED MY DOG WHEN I AM IN JAIL?!"

It's like handing in an exam in school and wishing you could grab it back and double check your answers one more time.

Who was that celebrity you heard about that went to jail for tax evasion? Because now you're convinced that's totally going to be you.

Spoiler alert: as long as you did everything to the best of your knowledge and ability, you probably won't go to jail. And even if you do, you'll find someone to walk your dog.

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"I got this, I'm almost done, a few more papers and I'm in the clear. I just have to pound through the rest of it. Go me!"

"Go you" is right! Now you're on cruise control and you're on track to get everything done well and on time. You're unstoppable in the delight of the world that is tax filing.

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"Thank god that's over with, now I can relax! What to do with all this stress-free free time!"
Finally, relief. Your papers are filed and sent out into the universe. It's off your back at last. Now on to more important things, like Netflix.

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"When is my return coming? Is this going to be my life for the rest of my life? Yep, it is. So about that return..."
Now, you wait. You want that money. And the inevitable truth that your life will now be a neverending cycle of filing taxes and waiting for your return.

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"SCORE my return was so much better than I expected! I'm buying a new dress. Or five. Probably five, why not?"
You're on a total life-high now. The possibilities of what you can spend your return on seem endless and even if you don't, having a nice bonus hunk of cash in your pocket feels pretty good. It made all of that stress completely worth it.

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"Honestly filing wasn't even that bad this year. And now I don't have to think about it anymore. Well at least not for another year. But no use in worrying about that now!"
Alas, acceptance. You know you'll fall victim to the vicious cycle again when next year rolls around. But truthfully, you wouldn't have it any other way. Okay, you obviously would. But you'll never change your procrastinating ways!

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Eliminating any major tax expenditure is politically fraught, but there are reasons to believe that the state and local tax deduction is a more viable target than many because it primarily benefits higher-income earners.

Related: Behind the Campaign to Kill the Trillion-Dollar Border-Adjustment Tax

The deduction can only be claimed by taxpayers who itemize their returns, something only about one-third of Americans do in the first place. The overwhelming majority of itemized filers take the state and local deduction, and the benefit of the deduction accrues disproportionately to Americans who earn more than $100,000 per year, about twice the median income in the U.S.

According to the Tax Policy Center in Washington, the top 16 percent of households by income account for 75 percent of the state and local tax deductions claimed every year, with an average claim of $12,300. For the very wealthy, that deduction rises dramatically. People earning a million dollars a year claim an average deduction of $261,000.

One point worth noting is that while the pain of eliminating the deduction would not be spread evenly across income levels, it also won't be spread evenly by geography. Individuals in states with relatively high income taxes and relatively high levels of per capita income would lose much more than residents of low-tax, low-income states.

In Maryland, New Jersey and Connecticut, for example, more than 40 percent of taxpayers claim the state and local deduction, with average claims of $12,400, $17,200 and $18,900 respectively. Other high tax states would also be disproportionately affected. In New York, more than 30 percent of filers take the deduction, claiming an average $21,000, the highest in the country.

The pain would be much lower in states like Texas, where fewer than 30 percent of taxpayers claim the deduction, with an average claim of $7,600, or South Dakota, where fewer than 20 percent claim it, with an average claim of $5,800.

Related: Trump's Wall, By One Estimate, Could Cost $70 Billion

Interestingly, the elimination of the deduction would also increase the disparity between so-called "donor" states, which send more in taxes to Washington than they receive in federal benefits, and "dependent" states, which take in more federal funding than they pay for in taxes.

Of the 18 states in which 30 percent or more of taxpayers take the state and local deduction on their federal taxes, all but four are donor states. And it won't be lost on Trump that the majority of those states also tend to vote Democratic in presidential elections.

More from The Fiscal Times:
The Best and Worst States for Property Taxes in 2017
A Lawsuit Claiming Trump Is Violating the Constitution Just Got Stronger
The 9 States With the Hottest Housing Markets to Start 2017

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