Among the proposals being considered in Washington for reforming the federal tax code is one that would eliminate the deduction that Connecticut taxpayers rely on most.
The president and House Republican leadership have called for eliminating the federal income tax deduction for state and local taxes, which disproportionately benefits high-income, high-tax states, such as Connecticut, that lean Democratic in national elections.
The change is one of many proposals being considered as part of a plan to overhaul the federal tax system. According to Tax Foundation summaries of President Trump’s and House Republicans’ plans, both would eliminate all individual itemized deductions except those for charitable giving and mortgage interest. In exchange, the plan would lower tax rates, so it is impossible to know exactly what the net impact would be for particular taxpayers.
The deductions being targeted include those for state income tax and local property taxes. In states that don’t have an income tax, taxpayers can deduct sales tax.
Connecticut Department of Revenue Services Commissioner Kevin Sullivan sees the proposal as baldly political. “It cannot do anything other than hurt, and I think that’s what it’s intended to do.”
More taxes, more to deduct
About 718,000 Connecticut taxpayers claimed a total of $13.6 billion in state and local deductions on their 2014 federal returns, according to IRS data.
The 718,000 figure represents about 41 percent of federal tax returns from Connecticut residents, who claimed an average deduction of $18,940. That compares with about 29 percent of taxpayers nationwide claiming an average deduction of $11,845.
Sullivan said he concurs that “the average hit would be $19,000 a year. For Connecticut this is the single-most relied-on tax deduction.” He called that a “huge hit on … the middle-income, working population of this state.”
Looking specifically at deductions for property taxes — which account for the bulk of municipal revenue — Connecticut residents claimed an average of $7,455, compared with $4,800 by taxpayers nationwide.
The state and local tax deduction benefits the wealthiest taxpayers the most, but it also benefits those who pay relatively more in state and local taxes, so even Connecticut residents with modest incomes get a higher benefit than taxpayers nationwide.
For example, Connecticut filers with earnings up to $25,000 claimed an average of about $5,500 — about the same as the national average deduction for people earning between $50,000 and $75,000. And Connecticut filers earning $10,000 to $25,000 were more likely to claim the deduction than those earning the same amount nationwide: 24 percent versus 19 percent.
In Connecticut and nationwide, the tax deduction benefits those who earn more. The state’s wealthiest residents, those earning $1 million or more, claimed an average deduction of $329,422 for state and local taxes.
| Item | % of U.S. returns | % of CT returns |
|---|---|---|
| All returns | 29% | 41% |
| Under $10K | 3% | 4% |
| $10K to $25K | 7% | 10% |
| $25K to $50K | 19% | 24% |
| $50K to $75K | 39% | 50% |
| $75K to $100K | 55% | 68% |
| $100K to $200K | 77% | 88% |
| $200K to $500K | 93% | 98% |
| $500K under $1M | 93% | 99% |
| $1M or more | 91% | 99% |
| Income | CT Avg. | National Avg. |
|---|---|---|
| All returns | $18,940 | $11,846 |
| Under $10K | $5,691 | $3,579 |
| $10K to $25K | $5,490 | $3,316 |
| $25K to $50K | $6,126 | $3,957 |
| $50K to $75K | $7,864 | $5,463 |
| $75K to $100K | $9,969 | $7,193 |
| $100K to $200K | $14,432 | $10,940 |
| $200K to $500K | $28,436 | $22,427 |
| $500K under $1M | $66,344 | $53,001 |
| $1M or more | $329,422 | $259,107 |
Sullivan acknowledged that the wealthiest benefit from the biggest-dollar deductions, but questioned the sincerity of the Trump administration’s characterization of the tax change as an economic fairness issue.
“When I’m ready to take seriously an argument by President Trump or the [Republican-led Congress] about their deep desire to make the wealthy pay more, then I might be moved by that argument,” Sullivan said.
The view from Washington
The proposal, like just about everything in Washington today, is far from a done deal.
While there is agreement between the White House and congressional Republicans on the broader goals of President Donald Trump’s tax framework, rifts have developed over details, including which deductions for personal income tax would be eliminated in exchange for lower tax rates.
Eliminating the deduction for state and local income taxes and property taxes has drawn GOP opposition. Several Republicans, including Rep. Leonard Lance of New Jersey, the state with the highest property taxes, have urged Treasury Secretary Steven Mnuchin not to eliminate these deductions.
House Speaker Paul Ryan hopes to take up tax reform after health care, but some say that is ambitious and the plan may have to wait until next year.
More pressure for troubled state finances
Economist Don Klepper-Smith, chief economist at DataCore, doesn’t welcome higher taxes. “One thing we know here is that we are the second-highest state and local tax burden in the country at about 12.6 percent of income, according to the Tax Foundation.”
Klepper-Smith pointed to Census estimates that show more people have been moving out of the state than in from other states. He said taxes alone are just part of people’s calculus when deciding where to live, but for some groups it might play a larger role, such as seniors looking to retire and pare down expenses — a population that is continuing to grow.
Washington correspondent Ana Radelat contributed to this story.