As David Kamin explains here, the House Republicans appear to have attempted a very sneaky move that they may have been hoping people wouldn't catch until it was too late. The committee report makes it clear that they are trying to make state and local income taxes still deductible for "business owners" and passive investors - but not for anyone else.
As a technical matter, they arguably screwed this up and failed to get the result they have stated they want. But the legislative language may well be, at a minimum, ambiguous enough to permit its being interpreted the way that they evidently want it to be.
For a full technical dive, read Kamin's just-posted column, including the full walk through at the end. But the basics are as follows:
The bill repeals the itemized deduction for state and local income taxes. Thus, no more state and local income tax deduction of any sort, UNLESS - and this is a big "unless" - it's a business expense or an expense of earning income.
So let's take 3 people: (1) Donald Trump (pass-through owner who gets the special 25% plutocrat's discount rate for business owners),
(2) Law Firm Partner, who doesn't get the 25% plutocrat's rate because he or she is in a service business (leaving aside the inevitable real estate partnership that owns the building and will be used to drain off profits from the service partnership, as Victor Fleischer has explained), and
(3) Regular Employee - in the law firm context, including associates, paralegals, and secretaries, but also generally all employees everywhere.
All three are in a trade or business. And the proposed legislation expressly says that state and local income taxes, though no longer allowable as an itemized deduction, can be treated as a business expense or expense of earning income. (See Kamin, in particular the appendix at the end, in re. why and how this may have changed from present law, under which state and local income taxes generally are forced into the itemized deduction rubric for individual returns, and otherwise can't be deducted by the individuals who incur them.)
But the bill also disallows ALL itemized deductions by employees in relation to their trade or business of being an employee. (This is probably intended in part as a sneak attack on deducting union dues, but it also reaches plenty of other meritorious items, along perhaps with some dubious ones, that under present law would generally be deductible below-the-line at least to the extent in excess of 2 percent of adjusted gross income.)
So here's where we end up, assuming that the above analysis is correct:
First, Trump still gets to deduct all of his state and local income taxes, other than those that relate to being an employee (which presumably will just be for his salary as president). Note that he also no longer has to worry about state and local income taxes being disallowed as an itemized deduction under the alternative minimum tax (AMT), since that is being repealed. So, his president's salary aside, he is actually getting an expanded state and local income tax deduction compared to present law, albeit that its value is reduced by the bill's slashing his marginal rate for most of his income to 25%.
Second, the law firm partner, although denied the 25% plutocrat's rate because he is in a service business, gets to deduct his state and local income tax because he incurs them as a business owner.
Third, all of the employees, at the law firm and elsewhere, are denied state and local income tax deductions because they are under the wholly disallowed employee business expense rubric.
Kamin asks in his blog whether the revenue estimators at JCT understood this when they prepared their estimates. I would presume that the answer is Yes, because (a) they're smart folks, would have spotted the issue, and would have needed to know how to estimate it, plus (b) the intent by the drafters appears to be quite clear. But in truth who knows at this point. If it fell between the cracks - or was successfully concealed from them - and they thus didn't know, then the revenue estimate for repealing the state and local income deduction is going to decline significantly. This is probably big enough to have nontrivial implications for the overall bottom line revenue estimate relative to the budget ceiling with which they were working.
If the proponents didn't mean to allow state and local income tax deductions for plutocrats and other business owners, while denying the deductions for everyone else, then they'd best say so ASAP.
I'm not easily shocked, but, unless an innocent explanation unexpectedly emerges, I consider this a truly disgusting episode. Trying to sneak in continued state and local income tax deductions for what are generally high-income people and no one else, and doing it in a way that meant significant legwork was needed to figure it out, is both substantively indefensible and a slap in the face of honest and open lawmaking.