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Mnuchin backs key provision in Trump tax plan that would hit Democrats hardest

A central element of the administration's tax reform plan would hit Democratic voters hardest.

Treasury Secretary Steven Mnuchin said Thursday the provision — eliminating the federal tax deduction for state and local taxes — remains an important part of the administration's reform plan.

"We can't have the federal government continue to subsidize the states," Mnuchin told CNBC's "Squawk Box." "That's a major loophole that we're trying to close in simplifying taxes."

Dropping the exemption would hit Democratic voters hardest, a CNBC analysis shows.

As congressional Republicans and the Trump administration attempt to overhaul the nation's tax code, much of the attention will be focused on changes that will end popular tax breaks to help pay for the revenue lost from lowering tax rates.

Among those in the plan's crosshairs is a long-standing provision that lets you deduct from your reported income the money you pay in state and local taxes on income, real estate or sales of big-ticket items.

President Donald Trump (R) and Treasury Secretary Steven Mnuchin walk out of the Treasury building, April 21, 2017.
Getty Images
President Donald Trump (R) and Treasury Secretary Steven Mnuchin walk out of the Treasury building, April 21, 2017.

Eliminating it would generate tens of billions of dollars in revenue needed to offset the money lost from lowering tax rates on individuals and corporations. For the tax years 2016 through 2020, letting taxpayers off the hook for taxes paid to state and local governments will cost the Treasury nearly $370 billion, according to a report from the congressional Joint Committee on Taxation.

Proponents of the deduction have long argued that, without it, taxpayers would be hit twice for each dollar of income, by their state and by the U.S. Treasury. Opponents argue that the deduction benefits the richest taxpayers at the expense of those with lower incomes, or who don't own a home or make large purchases that carry a big sales tax.

The provision tends to benefit wealthier individuals because they pay higher state and local taxes on income, real estate and other property. But the tax break also benefits some middle-income households, a realization that may complicate the White House's tax overhaul effort.

President Donald Trump reportedly grew angry when he learned that the change would hurt some of those middle-income taxpayers, Bloomberg reported Thursday.

The White House press office released a statement to Bloomberg that said in part: "The president has made it unequivocally clear that a key priority for tax reform is to cut taxes for America's hardworking middle class families."

One thing is clear: Eliminating the deduction would hurt taxpayers who voted for Hillary Clinton a lot harder than it would those who voted for DTrump, according to a CNBC analysis of voter and tax data.

The disparity is striking at the state level, where the bulk of the benefit for deducting state and local taxes goes to taxpayers in states with higher-than-average taxes and median incomes that are bigger than the national median.

Taxpayers in California and New York, among the bluest states in the country, would be the hardest hit. Of the total deductions claimed nationwide, half of the benefit in 2014 went to just seven states — California, New York, New Jersey, Illinois, Connecticut, Massachusetts and Maryland, according to a report from the Tax Foundation.

The impact is even starker at the county level, where the combined tax burden can vary widely within a given state. Of the 25 counties where taxpayers on average took the biggest deductions for payment of state and local taxes, only two of them voted for Trump in 2016.

It remains to be seen whether GOP tax reformers can succeed in striking from the tax code one of the oldest deductions. The move would likely face strong opposition from state lawmakers in all 50 state capitals, who would be under even greater pressure to hold the line on taxes at a time when state budgets are under strain.

Here's how the elimination of the deduction would impact your county:

WATCH: Treasury Secretary Steve Mnuchin on tax reform

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