The recently passed Tax Cuts and Jobs Act caps the federal deduction for state and local taxes (the SALT deduction) at $10,000. That’s bad news for people who pay a significant amount in such taxes and relied on the SALT deduction to reduce their federal-tax liability. In other words, it’s bad news for rich people who live in blue states. As Jared Walczak, a senior policy analyst at the Tax Foundation, has shown, more than 88 percent of the SALT deduction’s benefit flows to those who earn more than $100,000 in income, and the deduction itself is a boon to states with bigger governments.
The charitable observer might expect Democratic politicians to find solace in this provision of the TCJA. After all, it removes a major tax break for the rich. According to Ben Casselman’s report in the New York Times, however, state Democrats are mulling ways to rewrite their state-tax codes so that those wealthy residents can avoid paying more in taxes.
Companies, of course, have long sought to exploit loopholes in the tax code. Governments, as a rule, have not. State leaders, however, said Congress, in singling out certain states, had broken an implicit compact with the states.
In particular, officials in the high-tax states object to the law’s $10,000 cap on state and local tax deductions, which were previously unlimited. . . . ‘They want to target us for certain provisions?’ [governor of New York Andrew] Cuomo asked at a recent news conference. ‘Well, let’s see if we can redesign our tax code to get out of the federal trap that they set.’
One option that Cuomo (along with politicians from New Jersey and California) are reportedly considering is to repeal their income taxes and replace them with employer-side payroll taxes (which are federally deductible) of an equivalent amount. That would take away one of the TCJA’s major pay-fors, and spare these states the pressure from their constituents to cut taxes and rein in spending.
It would also spare those states’ wealthy residents from having to pay higher taxes. “Policymakers who have long championed a progressive tax code are grasping at straws for their wealthiest residents, and are evidently scandalized by the prospect that their own states’ high spending will no longer enjoy a generous subsidy from lower-income individuals in lower tax states,” Walczak tells me. For Democrats like Andrew Cuomo, all the talk about the rich paying their fair share appears to come with a hidden caveat: unless they’re ours.