N.Y., N.J., Connecticut Hurt Most If State Deduction Ditched

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 Sahil Kapur (Bloomberg), Che Odom (Bloomberg BNA), and Gerald B. Silverman

Elimination of the federal deduction for taxes paid to state and local governments would hurt states that give more to the federal government than they get back in federal spending.

That’s according to a report released Oct. 5 from the Nelson A. Rockefeller Institute of Government.

Taxpayers in Connecticut would be hardest hit by eliminating the state and local tax (SALT) deduction, particularly when combined with the state’s negative balance of payments with the federal government, the report said. It’s followed by New Jersey, New York, Massachusetts, Illinois, and California.

Taxpayers in Mississippi and Alabama would take the smallest hit, when their balances of payments are considered. They are followed by New Mexico, Alaska, and Tennessee.

The Republican tax framework, released Sept. 27, would eliminate many deductions for individuals, including the break for state and local taxes. Eliminating the deduction is one of the largest pay-fors in the GOP plan to cut tax rates, but Republicans from states with higher taxes have expressed concern it could raise taxes for their constituents. They are trying to convince U.S. House Ways and Means Chairman Kevin Brady (R-Texas) and other GOP leaders to soften the blow of cutting the tax break.

The proposal to eliminate the SALT deduction is generally opposed by lawmakers in high-tax blue states such as New York, New Jersey, Connecticut, and California.

According to the report, Connecticut taxpayers face a tax increase of $4,286 if the SALT deduction is eliminated. New Yorkers would face an increase of $4,250 and New Jersey taxpayers would face an increase of $3,522, according to the report.

The smallest tax increases from elimination of the SALT deduction would be in Alaska ($992), Wyoming ($943), and Tennessee ($938).

‘Dumb’ Idea

The Senate’s top Democrat unloaded at the Republican proposal to end the deduction Oct. 5, calling it “dumb” and predicting that it alone will “kill” the White House and GOP’s tax efforts.

Sen. Chuck Schumer (D-NY) said the use of the roughly $1.3 trillion tax break is “deep and wide” and affects many taxpayers in red states such as Utah and Iowa as well as New York and California. He labeled it the “Achilles heel” of the framework.

Schumer said the proposed tweaks that Republicans are considering to win over House members in high-tax states—such as an income cap or letting tax filers choose between deducting mortgage interest and state and local taxes—are “half baked and won’t work.”

Rep. Chris Collins (R-NY) said Oct. 4 that key GOP members have signaled to him the state and local tax deduction will be preserved in some form.

‘Richest 1 Percent’

Eliminating the deduction is designed to allow congressional Republicans to pay for individual and corporate tax cuts.

The White House has said the tax reform framework was crafted with the middle class in mind.

However, a report released Oct. 4 by the Institute on Taxation and Economic Policy, said the richest 1 percent of residents in all but a handful of states would receive at least half of the tax cuts being considered by Congress.

The framework calls for rate cuts in individual and corporate taxes for most taxpayers. More than two-thirds of the cuts contained in the framework would go to the richest 1 percent in 2018, the ITEP report said.

Those taxpayers are projected to have incomes of at least $615,800 next year, the report said. They would receive an average tax cut of $90,610 in 2018, increasing the incomes by an average of 4.3 percent.

The middle fifth of households, projected to earn between $41,000 and $66,000 in 2018, would receive an average tax cut of just $410 next year, which would increase their incomes by an average of just 0.8 percent, the report said.

To contact the reporter on this story: Sahil Kapur in Washington at skapur39@bloomberg.net (Bloomberg), Che Odom at COdom@bna.com (Bloomberg BNA), and Gerald B. Silverman in Albany, N.Y. at mailto:GSilverman (Bloomberg BNA)

To contact the editor responsible for this story: Jennifer McLoughlin at jmcloughlin@bna.com (Bloomberg BNA) and Alexis Leondis at aleondis@bloomberg.net (Bloomberg)

For More Information

Text of the Rockefeller report is at http://src.bna.com/s8G.

Text of the ITEP report is at http://src.bna.com/s87.

Copyright © 2017 Tax Management Inc. All Rights Reserved.

Request Daily Tax Report: State