N.Y., California Peg Billions in Losses From Axing Tax Deduction

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By John Herzfeld

The plan by President Donald Trump and GOP leaders to end the federal deduction for taxes paid to state and local governments would cost New York taxpayers $17.5 billion a year, New York Gov. Andrew M. Cuomo (D) said.

Cuomo issued a state analysis Sept. 28 estimating that 3.3 million New York taxpayers would have to pay an average of $5,300 more in annual federal taxes if the state and local deduction were scrapped. He called the Trump plan “illegal double taxation” and said it contravenes federal policy in place since 1862, when the first U.S. income tax was created to help finance the Civil War.

The analogous price tag in California could reach $25 billion, a spokesman for Gov. Jerry Brown’s (D) Department of Finance told Bloomberg BNA in an email.

The spokesman, H.D. Palmer, said that “the skeletal plan isn’t detailed enough to fully weigh its impact” but continued that it could “do great harm to larger states like California—and millions of hardworking families who live here—and further widen income disparities between the rich and poor.”

The increase in the federal tax bill for taxpayers who itemize deductions, Cuomo said, would “have enormous negative effects” on New York, including “thousands of lost jobs” and a multibillion-dollar hit to gross state product, economic activity, and personal income.

A group of congressional leaders and White House officials known as the Big Six released a framework of tax legislation Sept. 27 that Republicans hope to pass this year. The framework provides that “in order to simplify the tax code, the framework eliminates most itemized deductions, but retains tax incentives for home mortgage interest and charitable contributions.” This would drop the state-and-local tax deduction.

Groups representing state and local officials have vowed to lobby members of Congress not to go along with the plan. And they already have an ally in U.S. Rep. Tom MacArthur (R-N.J.), who told reporters after the latest Republican tax framework was unveiled that he’s a “loud objector” to the plan because it eliminates the state and local tax deduction.

Winners, Losers

The governors’ reactions came as the New York-based Rockefeller Institute of Government released Sept. 28 its annual “winners and losers” report, finding the state already contributes $48 billion more a year in federal taxes than it gets in federal funding.

That represents “a far greater ‘balance of payments’ shortfall than any other state,” Cuomo said. “The elimination of state and local tax deductibility will increase New York’s already disproportionate contribution.”

Thirteen states pay more to the federal government than they get in return, the report said. They are: New York, New Jersey, Illinois, California, Massachusetts, Connecticut, Minnesota, Texas, North Dakota, Colorado, New Hampshire, Nebraska, and Wyoming.

“Given the importance of understanding the impact changes in federal tax policies have on the states, it was critical to examine what states already gave in taxes versus what they get back from the federal government,” Rockefeller Institute President Jim Malatras said in a statement. “If some of the recent reports of potential tax reform proposals are true, many states, like New York, will face a double-whammy negative effect.”

Wish assistance from Laura Mahonery in Sacramento, Calif. and Gerald B. Silverman in Albany, N.Y.

To contact the reporter on this story: John Herzfeld in New York at jherzfeld@bna.com

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com

For More Information

The New York analysis, including tables, is at http://src.bna.com/sW8.

The Rockefeller Institute Report is at http://src.bna.com/sXi.

Copyright © 2017 Tax Management Inc. All Rights Reserved.

Request Daily Tax Report: State