The tax reform train is slowly moving forward for Republicans, but the snags once again are coming from within the party. This time, it’s opposition from Republicans who hail from mostly Democrat-leaning states who are fuming over possible elimination of the state tax deduction under the Trump plan. Under the current system, the amount you pay in state and local income tax can be deducted from your federal taxable income, which is known as the State and Local Tax deduction, or SALT, for short. This helps to offset the state taxes and save taxpayers money on their federal return. However, the proposed plan would do away with that deduction which will greatly affect states which have high state income tax rates, such as California, New York, Maryland, and many others.
Some background from the UK Daily Mail:
As President Trump prepares to sell his tax plan to the nation’s manufacturing lobby on Friday, his best-laid tax plans have already drawn objections from some fellow Republicans who are fuming over the decision to end deductions for state and local income taxes.
The situation will pit the White House against members of Congress from states that pile high income taxes on top of what the federal government takes from paychecks.
High-income Californians, for instance, pay as much as 13.3 per cent of their income to the state in addition to their federal taxes. New Yorkers can pay up to 8.82 per cent.
Just how much of a difference are we talking? Take this hyptheritcal:
Under the Trump tax reform plan, a family earning $100,000 in Los Angeles pays about $6,000 in state and local income taxes. Losing the ability to deduct that expense would cost the hypothetical taxpayers around $1,800.
In essence this means that some taxpayers would end up with a lower federal tax rate due to the cuts, but may end up paying more overall because they can’t deduct their state income taxes. The argument from many Republican is to ask why low-tax states like Tennessee or Texas should basically subsidize the high tax states like California and New York? The change is somewhat ideologically driven as well, since the deduction currently allows states to grow their budgets, raise their taxes, and have the federal government subsidize the increase.
Blue state politicians, such as Governor Andrew Cuomo of New York, are not taking the change lying down:
New York Gov. Andrew Cuomo (D) has called the elimination of the deduction a “death blow” to New York by putting it at a competitive disadvantage.
Cuomo told reporters Sept. 27 that elimination of the deduction was illegal, unconstitutional and amounted to “double taxation.” He said 3 million New Yorkers would pay an additional $17 billion in federal taxes, as a result.
“It is the height of hypocrisy,” Cuomo said. “Literally, they want to tax you on the taxes you pay. It is a pure tax increase.”
Cuomo is joined in his displeasure by Republican Rep. Peter King, who represents Long Island:
With members of both sides opposing the possible change, it’s not surprising to see the White House signal that eliminating the SALT deduction is up for negotiation:
President Donald Trump is open to negotiating on the deduction individuals take for state and local taxes, his top economic adviser Gary Cohn said Friday.
While the tax framework released Wednesday would eliminate that deduction, the provision isn’t a red line, according to Cohn, the director of the National Economic Council. The deduction is used extensively in high-tax states like New York, New Jersey and California. Eliminating it would raise an estimated $1.3 trillion that could be used to offset the plan’s proposed tax cuts.
“We are willing to work with the tax writers on the other dials that we have in the system,” Cohn said during a Bloomberg TV interview Friday.
Most conservative-leaning publications have argued that the SALT deduction should be eliminated, as per this article from Forbes in 2014:
The most fundamental problem with the state and local deduction is that it incentivizes and acts as a federal subsidy for state and local tax hikes. Uncle Sam should not helping high tax states and municipalities mask the fiscal burden they place upon their residents, but that’s exactly what the state & local income tax deduction does. The morally hazardous aspect of this provision is the way in which it encourages higher state taxes and forces taxpayers residing in fiscally-responsible and well-governed states to pay for the actions profligate politicians in states like Illinois, Connecticut, and California.
The conservative Heritage foundation, a Washington think tank, has also called for eliminating the deduction.
The terms of the plan are still up for negotiation, but don’t be surprised if things change to where the elimination of the SALT deduction will be either removed from the plan, or mitigated in somewhat to satisfy the blue state Republicans in the House who may fear a backlash from their districts.