States paying the most taxes to U.S. will take biggest hit from SALT deduction limit

Some of the states that are paying the highest amounts in federal taxes are also the ones that will be hurt the most by the $10,000 limit on the state and local tax deduction under the Tax Cuts and Jobs Act, according to a new study.

The research, by the personal finance site MoneyRates.com, found significant variations in the amount of federal income taxes paid by residents of different states. California topped the list of states contributing the most revenue to the federal government, with residents paying a total of $227.5 billion in taxes. That amount exceeded the total taxes paid by the 25 lowest-paying states, meaning California alone pays more taxes than half the other states combined.

To find out which state’s residents would be hurt most by the cap on the SALT deduction, MoneyRates examined the SALT deductions taken previously by high-earning residents. Again, California led the way, with a total of $96.9 billion in SALT deductions.

“One of the main arguments for capping the SALT deduction was to make sure that states with high taxes were paying their fair share of federal taxes, but eight of the top 10 states from our survey were already on the top 10 list of total federal tax contributors,” said MoneyRates.com senior financial analyst Richard Barrington in a statement. “Many of the states whose residents are already paying the largest total federal tax bills could see those tax bills go even higher due to the SALT cap.”

Albin Lohr-Jones/Bloomberg

In total, 59 percent of all federal personal income taxes are paid by the top 10 states. They are:

1. California: $227.5 billion
2. New York: $133.3 billion
3. Texas: $117.7 billion
4. Florida: $92.8 billion
5. Illinois: $67.7 billion
6. New Jersey: $61.9 billion
7. Pennsylvania: $58.8 billion
8. Massachusetts: $51.9 billion
9. Ohio: $43.6 billion
10. Virginia: $43.2 billion

“When the residents of just 10 states pay more than half the personal income taxes the federal government takes in, it gives you an idea of just how unevenly tax burdens are spread across the 50 states,” said Barrington.

Lawmakers in so-called "blue states" led by Democrats had fought against the Republican-led tax law with its limits on the SALT deduction in 2017. Last month, New York Governor Andrew Cuomo called it a “declaration of an economic civil war between Democratic states and Republican states,” and New Jersey Governor Phil Murphy said the SALT deduction limit “guts the middle class" (see New York's Cuomo vows to keep state, local tax fight alive).

The research also looked at tax burdens on a per capita basis and found Connecticut paying the heaviest share of federal taxes, at nearly twice the national average of $5,512. On top of that, the average percentage of income that residents of the state pay is 17.65 percent, nearly 3 percentage points higher than the national average of 14.77 percent.