Politics Complicate Tax Vote for GOP

By Kristina Peterson and Peter Nicholas Features Dow Jones Newswires

House Republicans, surprised by Democrats' dominance in this week's elections in Virginia and New Jersey, have pinned their hopes of retaining the House majority next year on passing a tax-code overhaul. But the details of the tax legislation could create new political burdens for some of the most vulnerable GOP incumbents.

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The tax bill hits constituents hardest in areas of the country that tend to have higher taxes. These blue-leaning states also happen to be home to many of the 23 congressional districts held by Republicans where Democratic nominee Hillary Clinton won last fall.

Those GOP incumbents are the top targets for Democrats, who need to win a net of 24 seats to retake control of the chamber.

Democrats on Tuesday were able to test their strategy in Virginia's state legislative races. In races for the House of Delegates, they targeted 17 Republicans serving in state districts Mrs. Clinton won. They defeated 14 of them, and picked up one other seat. They are awaiting recounts in two races, putting them tantalizingly close to regaining control of the state House for the first time since 1999.

Now, Democrats are hoping to repeat that performance in next year's midterms.

Nationally, Republicans representing high-tax areas "are caught between a rock and a hard place because their base wants them to produce a tax bill, but what's in that tax bill will matter to the voters in November, " said Rep. Gerry Connolly (D., Va.).

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Democrats face their own political challenges on the tax bill. Some Democrats in districts won last fall by Donald Trump are likely to face constituents who back the GOP tax bill.

For Republicans in high-tax states, the two most problematic components of the House GOP tax bill are its cap on the mortgage-interest deduction on loans of up to $500,000, down from the current $1 million limit, and the elimination of the tax deduction for state and local income taxes. GOP leaders want to end those tax breaks to help offset the cost of lowering many individual income tax rates and the corporate tax rate.

But for more affluent constituents of high-tax states, including New York, New Jersey and California, the changes could leave them paying more, even after GOP leaders agreed to restore the property tax deduction up to $10,000. Those constituents are more likely to itemize their deductions and own homes requiring more than a $500,000 loan.

"It seems like the high-tax states are paying more than their fair share, " said Rep. John Katko, a New York Republican in a district won by Mrs. Clinton. Mr. Katko said he is currently undecided on the tax bill.

Rep. Leonard Lance (R., N.J.) said he is opposed to the tax legislation because of the elimination of the deduction for state and local taxes. In his district, more than 53% of tax returns take advantage of the deduction, the third highest of all congressional districts, according to the Tax Policy Center.

"It is a matter of fundamental fairness that this be preserved. There shouldn't be winner states and loser states," said Mr. Lance, whose district Mrs. Clinton won. Mr. Lance said he was concerned about the Senate version of the tax bill, where the property tax deduction is fully eliminated. "I certainly don't favor that," he said Thursday.

House Republican leaders can afford to lose no more than 22 GOP votes when the bill comes to the floor next week if no Democrats support it. That's sharpened their pursuit of Republicans like Messrs. Katko and Lance.

House Speaker Paul Ryan (R., Wis.) said that taken in totality, the bill will benefit many constituents of those competitive districts, since it lowers many rates and nearly doubles the standard deduction. But he acknowledged the decision to restore the property tax deduction was a response to those concerns.

"Hundreds of billions of dollars have been added back to the bill to accommodate those very legitimate concerns so that people are benefiting, " Mr. Ryan told reporters Thursday.

Still, Rep. Darrell Issa (R., Calif.) this week came out against the bill. "It has an awful lot of tax increases on some to pay for tax cuts on others, and to me, that's not consistent with Republican values," he said.

The White House sent polling data to 200 Republican congressional offices showing how people in various districts feel about the proposals. The surveys were done by the Republican National Committee and shared with the White House.

In the poll, people were asked broadly if they supported "reforming the tax code to simplify it, make it fairer by removing loopholes and providing tax cuts for the middle class" and reducing the corporate tax rate to create new jobs.

In Mr. Lance's district, for example, the RNC polling showed that about 77% of likely Republican primary voters favored the tax plan, compared to 53% of all voters who supported it.

Bill Stepien, the White House political director, said in an interview Thursday that "2018 is around the corner and some members wonder about the pathway to a majority and keeping the majority. To me, this is it."

Democrats said other polling shows that voters grow more concerned about the tax bill as they learn more about its details, how it could affect their own tax returns and what benefits it would offer to major corporations.

Independent analyses have found that the House GOP bill cuts taxes on average for most income groups, particularly in the first few years, but those benefits of the tax bill fade for many households over time.

Democratic challengers to Republicans in the most competitive districts view the tax bill as an opening for them. On the day in late October that Rep. Mimi Walters (R., Calif.) voted for the House GOP budget, clearing the way for the tax bill, one of her Democratic challengers, Kia Hamadanchy, sent out an email flagging Mrs. Walters' vote and how the tax proposal could wipe out the state and local deduction.

"It is completely out of touch in terms of what's good for the people of Orange County," Mr. Hamadanchy said in an interview this week. More than 46% of tax returns in Mrs. Walter's district used the state and local tax deduction in 2014, according to the Tax Policy Center.

Mikie Sherrill, a Democrat challenging Rep. Rodney Frelinghuysen (R., N.J.), whose district has the second-highest percentage of tax returns using the state and local tax deduction, said: "These are the districts they need to keep and I don't see this helping them."

Mr. Frelinghuysen said in a statement that he is evaluating the tax bill.

The mortgage interest deduction cap at $500,000 would also be a blow to many in the district, Mr. Hamadanchy said. "I understand that for a lot of people in this country $500,000 is quite a bit," he said, "but the cost of living in Orange County is really, really high."

Mrs. Walters said Thursday that she planned to support the tax bill, arguing that it would benefit middle-class families.

"As long as middle-income Americans take more money home in their pocket, I am on board with the tax reform package," she said.

Other California Republicans have said the high state taxes shouldn't prevent the House GOP from acting to broadly lower taxes across the country.

"Just cause we're a high-tax state with a stupid government doesn't mean we're going to hold down the rest of the American economy," said Rep. Duncan Hunter (R., Calif.).

--Joshua Jamerson contributed to this article.

Write to Kristina Peterson at kristina.peterson@wsj.com and Peter Nicholas at peter.nicholas@wsj.com

(END) Dow Jones Newswires

November 09, 2017 20:23 ET (01:23 GMT)