Slashing State, Local Deduction May Foil ‘Rich Taxes': Panelist

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 Ryan Prete

Paring down the federal deduction for state and local taxes could hinder state efforts to enact a “millionaire’s tax,” according to a leading state tax practitioner.

Brian J. Rebhun, U.S. asset management tax leader at PricewaterhouseCoopers, said Dec. 4 that wealthy individuals would have less of an incentive to stay in a state pursuing a tax on higher-earners if Congress limits the deduction for taxes paid to state and local governments.

“The question I see is how will the states respond to the loss of the state and local tax deduction? Will they be able to support a higher tax rate on high wage earners while that wage earner has the means to move to a low-tax jurisdiction?” Rebhun said during a panel at New York University’s Institute on State and Local Taxation.

Both the House bill (H.R. 1) and the Senate-amended bill would retain a deduction up to $10,000 in property taxes paid to state and local governments. The federal code currently allows individuals to deduct the cost of sales, income, and property taxes paid at the state and local level (SALT deduction).

Rebhun said wealthy taxpayers may migrate to states such as Florida or Texas that don’t impose a state income tax if Congress trims the SALT deduction.

“If you think about moving out of New York City for Florida or Texas, it could potentially be a savings of almost 15 percent of your total income,” Rebhun said.

California, Connecticut, Maine, New Jersey, New York, and the District of Columbia currently impose a surplus tax on high-wage earners, according to Rebhun. New York City and Seattle also impose a high-wage income tax. However, the Washington Superior Court struck Seattle’s “rich tax” Nov. 22, and city officials are planning an appeal before the state Supreme Court.

Elections Moving Mobile Workforce?

Meanwhile, states are watching for congressional movement on the Mobile Workforce State Income Tax Simplification Act of 2017 (H.R. 1393). The proposed federal legislation, which passed the House by voice vote in June, would prevent states from taking income tax from people who work 30 days or less within their borders. The measure remains in the Senate Finance Committee, along with a Senate companion bill ( S. 540) with identical language that had a June hearing before the Small Business and Entrepreneurship Committee

Liz Malm, senior policy analyst and economist at the consulting firm MultiState Associates Inc., said during the Dec. 4 panel that the November 2018 mid-term elections could be a pivotal opportunity to recruit additional sponsors. The House bill currently has 57 co-sponsors, and the Senate bill has 56 co-sponsors.

However, the bill faces strong opposition from New York lawmakers, particularly in the Senate.

To contact the reporter on this story: Ryan Prete in New York at rprete@bloombergtax.com

To contact the editor responsible for this story: Cheryl Saenz at csaenz@bloombergtax.com

For More Information

For a road map of where to find key provisions and compare the House and Senate bills, read Bloomberg Tax’s analysis.

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