States, counties worry over GOP tax plan

A plan to pay for a massive overhaul of the federal tax code has state and local officials worried their constituents could face much higher bills in the future.

The tax-reform framework laid out by congressional Republicans and President Trump on Wednesday would eliminate a deduction for state and local taxes, a popular option known as SALT that is claimed by millions of Americans, especially in states with higher income tax rates.

Eliminating the deduction would raise $1.3 trillion in taxes over the next decade, according to the National Association of Counties, money that could pay for cuts to the corporate tax rate and cuts to higher-income taxpayers. 

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Supporters of the deduction, first included in the nation’s first tax code back in 1913, say its end would mean taxpayers are taxed twice on the same income. More than 95 percent of all taxpayers who itemize their deductions, about 28 percent of federal income tax filers, took advantage of the SALT deduction in 2014, according to the Tax Foundation.

“This is not a partisan issue. This is about helping everyday Americans make ends meet. This is about allowing states and communities solve state and local problems,” said Greg Cox, a Republican member of the San Diego County Board of Supervisors and vice president of the National Association of Counties.

Paul Potamianos, executive budget officer at the Connecticut Office of Policy and Management, said 41 percent of all returns in his state claimed the state and local tax deduction last year.

“It hits a very large segment of the population here in the state,” Potamianos said.

The Government Finance Officers Association has found that the average household takes a deduction of more than $7,000 in Connecticut, New York and New Jersey, and nearly $6,000 in California. Most of those deductions go to taxpayers who earn less than $50,000 a year.

Republicans say the deduction amounts to an unfair subsidy for states that levy high-income taxes on their own residents. 

“Is it fair that other states subsidize states that have high state taxes?” House Majority Leader Kevin McCarthy (R-Calif.) said on the Fox Business Network on Thursday morning. “Look at California. California is one of the most mismanaged, highest-tax states in the nation. And they use an argument inside that Capitol, ‘Let’s raise taxes, as you can write it off on your federal income tax.’ Well, that’s not fair for all of America.”

The Republican plan “would actually encourage states to manage their states better,” he said.

Potamianos said Connecticut and other wealthy high-tax states already send billions more dollars to the federal government than they receive in federal funding. States that levy higher taxes are less dependent on the federal government for their budgets, the Tax Foundation has found.

“It’s redistributive at the federal level,” Potamianos said.

Economists and state experts say the impact of ending the deduction on local government budgets is uncertain, but likely to be significant.

“The SALT deduction is large, and eliminating it is likely to have large effects,” said Don Boyd, a state budget expert at the Rockefeller Institute of Government. “These effects will roll out over time in ways that are not easy to predict. It is a budget forecaster’s nightmare.” 

On Wednesday and Thursday, a number of Republicans in Congress voiced skepticism over the plan to scrap the deduction, a hint that GOP leaders face a tough path ahead.

“A number of us have said publicly and privately that we’re quite concerned about this path. This is only a framework. I can’t say I’d vote for or against something that’s not even written,” said Rep. John Faso (R-N.Y.). “Obviously I think New York state shouldn’t tax and spend so much, but I’m dealing with reality, not what we wish for.”

“It is a very significant deduction for New Jersey. Very significant,” said Rep. Leonard Lance (R-N.J.). 

Rep. Tom MacArthur (R-N.J.) said he is “not supportive” of ending the SALT deduction.

On the Senate floor, Senate Minority Leader Charles Schumer (D-N.Y.) said residents in high-tax states would feel the pinch.

“There are 40 or 50 Republican congressmen from well-to-do suburban districts, in high-tax states like New York, California, New Jersey, Pennsylvania, Illinois and Maryland whose constituents will be clobbered by removing state and local deductibility. Clobbered,” Schumer said.

— Niv Ellis contributed.