Must-Read: David Kamin: Fixing the Loophole in the House Limit on Deductibility of State and Local Income Taxes: “First, under the legislation…

…is there a loophole in the proposed limit on deductibility of state and local income taxes allowing investors and pass-through business owners (partners in law firms or private equity firms or Donald Trump himself) to take an itemized deduction for the state and local income taxes they pay on their profits, even as employees cannot? Our assessment: Based on the current legislative text and the descriptions of the legislation so far offered by Ways and Means staff and some JCT written materials, we believe the answer to this is “yes”—the best reading is that there is such a loophole.

Second, do the current revenue and distributional estimates from JCT take this “pass-through” loophole into account? Our assessment: Based on what we have seen so far and comparing the JCT revenue estimate to others, we believe the answer is likely “no” and that JCT, contrary to what the bill seems to do, has assumed that no state and local income taxes are deductible as an itemized deduction—whether paid by a business owner, investor, or employee.

Third, do the revenue and distributional estimates take into account how states and localities could restructure their income taxes to preserve deductibility for trade and business owners (but not employees), even if the itemized deduction really is barred? We explain later in this post exactly how this restructuring would work to essentially preserve deductibility of state and local income taxes for pass-through business owners. Our assessment: Again, our best guess is that the answer is “no” and that the JCT estimates are much too optimistic for this reason alone…