Individual Income Insights: SALT Deductions—Who Wins and Who Loses if the Deductions Are Eliminated?


New York State Capital

While Congressional tax reform legislation is edging closer to passage, one of the main challenges it faces is the proposed repeal of the state and local tax (SALT) deductions. Approximately $96 billion will be written off by U.S. households claiming a deduction for state and local taxes in 2017, according to the Tax Policy Center. The deduction disproportionately benefits the highest earning residents of the high tax states, and therefore, affects Americans across the country in different ways. 

States with the most to lose under the current version of the law include California, New Jersey, and New York, as these jurisdictions impose high state and local taxes. On October 27, New York Gov. Andrew Cuomo (D) and California Gov. Jerry Brown (D) held a joint conference to discuss the federal SALT deduction repeal and the effect it would have on their state economies. The conference follows a letter penned by the United States Conference of Mayors, urging the U.S. Congress to keep the SALT deduction in any planned federal tax reform. States are anxious to stay ahead of an increase to their tax burden, and several have proposed breaks and incentives to counter a federal tax hike. 

New Yorker SALT Repeal Tax Increase? Fuhgettabout It!

New York residents pay the most in state and local individual income taxes, according to a study by the Tax Foundation. The New York Department of Taxation and Finance administers over 40 state and local taxes and fees, and during the 2015–2016 fiscal year, collected $47 billion in state personal income taxes, $11 billion from New York City income taxes, and $8 billion in local income taxes. A repeal of the federal state and local tax deduction could cause a drop in state tax revenue, as residents may flee to lower-tax states, which has New York officials on edge.

New York, attempting to stay ahead of federal tax legislation, has drafted legislation in response to the federal repeal of the SALT deduction to mitigate any impact of the federal bill. New York State Sen. Felder (D) introduced S. 6951, which would create a tax credit known as the “Hold New Yorkers Harmless Tax Credit,” equal to any increase in the federal tax liability. The bill measures federal tax liability increases by comparing the Internal Revenue Code as of Nov. 1, 2017, to the Internal Revenue Code after potential federal tax legislation is passed. Legislators are concerned about the effect of the SALT repeal, because New York residents would stand to lose the most. 

California Braces for Tax Increase Shockwave

California has concerns of its own, embodied in a letter written by a coalition of California city mayors opposing federal repeal of the state and local tax deduction. California’s top income tax rate is the highest in the country at 13.3 percent, meaning that California taxpayers are particularly sensitive to any change in the deduction. “Californians would face the largest net tax increase, at $12.1 billion in 2027 alone” should the deduction be repealed, according to a study by the Institute on Taxation and Economic Policy. The average value of the state and local deduction for California households in 2015 was $18,438, representing a steep tax hike should the federal legislation pass. State personal income tax is by far the largest source of revenue for California, accounting for around 65 percent of all state tax revenue for fiscal year 2013–2014. Dependence on personal income taxes, and the threat that the repeal of the federal state and local tax deduction represents, has led to concerns over whether some California residents will flee to Washington or Texas, states without an income tax. 

The debate has begun to heat up, with Gov. Brown and U.S. Rep. DarrelI Issa (R-CA), who represents the San Diego area, trading jabs through strongly worded letters. Brown began by writing a letter to Issa imploring him to oppose federal tax reform, especially reform that included a repeal of the state and local tax deduction. Brown decried the speed at which the legislation was moving and accused Issa of raising taxes on individuals while lowering them for corporations. Issa responded by reminding the governor that it was his policies that made California vulnerable, through state income tax increases and an unfriendly business environment. Should the federal, state, and local tax deduction be enacted, expect Brown to call for legislation to protect Californians from a higher tax bill through tax incentives at the state level. 

Federal tax reform has several hurdles to overcome before it becomes law, and many provisions could change significantly. Keeping abreast of these changes will inform taxpayers on how they will be affected personally, which is especially important for the residents of high tax states. 

 

*Compiled by Emily White. Emily White is a State Tax Law Editor at Bloomberg Tax and the 

latest Individual Income Insights contributor on our team. 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Is the federal SALT deduction a subsidy for high tax states or a mechanism to prevent the double taxation of personal income? 

To learn more about Congress’s tax proposals, download Bloomberg Tax’s Roadmap to House and Senate Tax Reform Plans, available here.

 

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