In liberal bastions like metro New York and California, the Trump tax overhaul has been criticized as economic warfare. But as elements of the plan come into focus, tax experts are concluding that some of the most dire predictions for high-tax blue states—particularly surrounding the treatment of state and local taxes—may not pan out as feared.
In blue New Jersey, for instance, the new law will raise taxes on about 285,000 filers earning between $79,890 and $336,620, with a typical hike of about $1,400, according to an analysis by the liberal Institute on Taxation and Economic Policy. However, more than 1.2 million New Jerseyans in the same income range will get a cut, with typical savings of about $3,000, according to the analysis.
That hasn’t stopped blue-state governors from supporting workarounds to thwart parts of the $1.5 trillion tax regime, signed into law Dec. 22 by President Donald Trump.
Tax Irony
The provision most bitterly opposed during the legislative debate was the $10,000 cap on federal deductions for state and local taxes, or SALT. In places such as West Virginia and Mississippi, that amount is sufficient for most taxpayers. In high-tax states, it’s a pittance. So the governors—Jerry Brown of California and Andrew Cuomo of New York—and New Jersey Governor-Elect Phil Murphy are entertaining ways states can provide the relief the feds have taken away.
The irony is that after weeks of blasting the tax changes as benefiting America’s wealthy, their efforts would likely cut taxes even deeper for their richest residents.
“State proposals to restore the full SALT deduction through legally suspect workarounds represent an attempt to provide additional tax benefits for high-income filers, even though they—like almost all taxpayers—are already getting a tax cut,” Jared Walczak, senior policy analyst at the conservative Tax Foundation, said in an email.
Steve Wamhoff, a senior fellow at the Institute on Taxation and Economic Policy, agreed that the workarounds would benefit the rich.
“The federal government gave out tax cuts that disproportionately favored wealthy people,” Wamhoff said. “Is the answer for states to give more tax cuts that favor wealthy people?”
Brown called the cap on SALT deductions “an assault by the Republicans’’ on high-tax blue states. He said Wednesday he was open to a bill in the California legislature that would make tax payments charitable contributions, which aren’t subject to the cap. The legality of the idea is open to question.
New Jersey’s Murphy, who will take office Jan. 16 after being elected in November, had pushed for additional taxes on the wealthy during his campaign. Last week, he said he would work on a similar plan to essentially convert property taxes to charitable contributions.
Cuomo called the SALT-cap provision “devilish’’ and the tax bill “economic civil war’’ against blue, or Democratic-majority, states. He vowed to sue the federal government and change New York’s tax code. One of the options under consideration is swapping the state income tax for a payroll tax paid by employers, which would be fully deductible.
Federal Pushback
At a Thursday press briefing, Treasury Secretary Steven Mnuchin called efforts to transform property taxes into charitable contributions “ridiculous.”
“I hope that the states are more focused on cutting their budgets and giving tax cuts to their people and their states than they are on trying to evade the law,” he said.
The governors’ pronouncements play well politically, tapping into opposition to the president. Trump received 33 percent of the 2016 vote in California, 37 percent in New York and 42 percent in New Jersey.
They also soothe taxpayers angry about their disproportionate share of the federal tax burden. New Jersey subsidizes other states more than any other, according to a 2017 study by the California Legislative Analyst’s Office, meaning that the state sends more money to Washington than it gets back. New York is fifth on that list and California is 10th. The biggest takers are Mississippi, New Mexico and West Virginia, which get more from the federal government than they pay.
Unequal Treatment
Also likely to feed feelings of unequal treatment: All other things equal, the SALT cap means that federal tax cuts are bigger in low-tax states.
One Democratic critique of the tax law rings true. In New Jersey, for instance, the top 5 percent of earners get 50 percent of the savings delivered to state residents by the new federal law, according to an analysis by the Institute on Taxation and Economic Policy.
“I would be surprised if two or three states don’t enact some kind of legislation geared at a workaround,” said Max Behlke, director of budget and tax in the National Conference of State Legislatures’ Washington office. “You have the opposition party saying, ‘We’re going to challenge the federal government to protect our taxpayers.’ That drumbeat will go through November.”
