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President Donald Trump’s plan to overhaul the federal tax code would scrap the popular deduction for state and local taxes—and taxpayers in high-tax states, particularly blue states like New York, New Jersey and California, are likely the biggest losers.
During an April 26 press briefing, Treasury Secretary Steven Mnuchin and National Economic Director Gary Cohn confirmed that the administration’s tax proposal would jettison all itemized deductions for individual taxpayers, with the exception of mortgage interest and charitable contributions.
Earlier in the day, Mnuchin said it isn’t the federal government’s job to subsidize the states, adding that the administration isn’t trying to raise taxes on the top 1 percent, but rather get the federal government out of what is the states’ business.
But elimination of the state and local tax deduction doesn’t reconcile with the intent of the federal code and goes against the principles of taxation, Max Behlke, director of budget and tax policy at the National Conference of State Legislatures, told Bloomberg BNA, noting that deductions for state and local taxes have been in place since the institution of the federal income tax in 1913.
Under current law, taxpayers who itemize can deduct certain non-business tax payments to state and local governments from their taxable income. During his campaign, Trump proposed capping these deductions, while the House Republican blueprint advocated repealing them entirely so that the money could be used for other reform priorities, such as reducing corporate income tax rates.
Trump’s plan eliminates “most of the tax breaks that are mainly a benefit to high income individuals,” Cohn said, noting that “home ownership, charitable giving and retirement savings will be protected.”
“The lion’s share of state and local tax deductions are claimed by upper-income earners,” the Tax Foundation said in a March 15 report. That’s because the majority of tax filers who itemize their returns make more than $50,000 in annual adjusted gross income.
The Washington, D.C.-based group said eliminating the SALT deduction would raise about $1.7 trillion over 10 years. And it would result in a 2.2 percent tax increase on the income of individuals in the highest quintile.
“According to the Joint Committee on Taxation, more than 88 percent of the benefit of state and local tax deductions accrued to those with incomes over $100,000 in 2014, while only 1 percent flowed to taxpayers with incomes below $50,000,” the report said.
A March 2017 report from the liberal-leaning Urban Institute & Brookings Institute agreed that high-income households are more likely to benefit from the SALT deduction. “The amount of state and local taxes paid, the likelihood that taxpayers itemize their deductions, and the reduction in federal income taxes for each dollar of state and local taxes deducted all increase with income.”
The left-leaning Center on Budget and Policy Priorities, however, wrote April 26 that young, undocumented immigrants pay a larger share of their individual income in state and local taxes than the top 1 percent of taxpayers.
Regardless the plan goes against the call from states to preserve the popular tax deduction.
In an April 4 letter to Congress, a coalition of nonpartisan groups representing state and local governments cautioned that eliminating or capping federal deductibility for state and local taxes “would represent double taxation, as these taxes are mandatory payments for all taxpayers.”
“By eliminating the federal deductibility of these taxes, Congress would be shifting the intergovernmental balance of income taxation and could limit state and local control of our tax systems,” according to the letter, whose authors included the National Governors Association and the National Conference of State Legislatures. “Abolishing federal deductibility could also greatly constrain policy options available to states and local governments facing economic hardships and increased responsibilities due to the devolution of federal programs.”
Elimination of the tax break will be most felt by high-income, high-tax states like California, New York and New Jersey, which overwhelmingly go blue in presidential elections.
In the aftermath of the April 26 briefing, New Jersey Rep. Leonard Lance (R) voiced opposition to ditching the state and local tax deduction, cautioning that New Jersey taxpayers would lose under the plan.
New York Gov. Andrew M. Cuomo (D), in an April 5 briefing with reporters, said eliminating the federal deductibility of state and local taxes would increase taxes for the average New Yorker by 20-40 percent. “And I think we could see flight of higher paying taxpayers if something like that happened,” he said.
According to a 2016 analysis by the Tax Foundation, the average state and local tax deduction taken per return in Manhattan was $24,652. In nearby Westchester County, the average deduction was $14,817.
The April 26 briefing unveiled the White House’s opening bid for what officials called the “biggest tax cut” in American history.
A list of goals for the tax overhaul calls for reducing the federal income-tax rate to 15 percent for corporations, small businesses and partnerships of all sizes. It also imposes a one-time tax on about $2.6 trillion in earnings that U.S. companies have placed overseas. The plan would end the taxation of corporations’ offshore income by moving to a territorial system, in which most foreign profits would be exempt from U.S. taxes. The U.S. currently taxes business income no matter where it’s earned.
On the individual side, the plan would condense the existing seven income-tax rates to just three, cutting the individual top rate to 35 percent from 39.6 percent. It would also end a 3.8 percent net investment income tax that applies only to individuals who earn more than $200,000 a year, and eliminate the estate tax, which applies only to estates worth more than $5.49 million for individuals and $10.98 million for couples.
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