Washington – “Blue” states like Connecticut that say they were targeted in the GOP’s federal tax overhaul are looking for ways to protect their residents from the negative impact of the new cap on the deductibility of state and local taxes.
The problem for many taxpayers in high-income states is that the new tax law limits to a total of $10,000 the deductibility of, in Connecticut’s case, state income and municipal property taxes.
That won’t affect many taxpayers in lower-income, lower-tax states like Alabama or Missouri, but states that have high incomes and costs-of-living, like Connecticut, New York, California, and New Jersey — states that also tend to trend Democratic — say they are being disproportionately punished and are looking for ways around the new limitation.
“Everyone is looking to see if there’s something we can do,” said Connecticut Department of Revenue Services Commissioner Kevin Sullivan.
Sullivan said Connecticut is considering a proposal New York and other states are weighing, and that is for states to replace their income tax with payroll taxes paid by employers, like the current Social Security and unemployment insurance taxes that businesses now pay.
The way it would work is this: Companies would reduce workers’ pay by the amount of their state tax liability and the employer, not the individual, would pay it to the state.
Since companies are not limited like individual taxpayers by the new federal tax code’s cap on the deductibility of state and local income taxes, the companies would not lose any money under this arrangement.
Meanwhile, because the worker never received the money, he or she would not have to pay taxes on it.
“The primary [proposal] we’re looking at is the wage withholding change,” Sullivan said. “We’re trying to find out how it’s workable and if it’s workable.”
Sullivan said a possible problem with the plan is that those who don’t receive paychecks and have other forms of income would not be able to benefit.
And, Sullivan said, if “blue” states are successful in finding ways to keep the so-called SALT taxes deductible, the federal government would face an unexpected shortfall in revenue and “come sweeping down” to challenge those states.
“But my position is ‘they did not care about us, and I don’t care about them,’” Sullivan said.
California, where the average state and local tax deduction is $22,000, is considering turning state and local income tax payments into charitable deductions, which are still fully deductible under the new federal tax code.
“The Republican tax scam disproportionately harms California taxpayers,” said California Senate leader Kevin de León.
He plans to introduce a bill in the California legislature this week that would allow state taxpayers to pay their taxes through a contribution to a new “California Excellence” fund that would classify those payments as charitable deductions.
De León based his plan on a state law that was approved in 2014 that allowed a certain percentage of donations to a state college affordability fund to be credited toward the donor’s state and local tax liability.
The California lawmaker also argues that the Internal Revenue Service ruled in 2011 that money given to the state’s general fund could be classified as a charitable donation.
Sullivan said he’s “not sure we’re going to look at” California’s plan.
Still, the limitation on the deductibility of state, local and property taxes, beginning this year, has prompted blue states to think creatively about how they can help their taxpayers.
In several states there were post-Christmas rushes to pay property taxes due in 2018 ahead of time.
Gov. Andrew Cuomo of New York signed an executive order allowing the prepayment. So did New Jersey Gov. Chris Christie, a Republican and early supporter of President Donald Trump.
Other jurisdictions made similar moves. For instance, the county council in Montgomery County, Md., hurriedly passed the Property Tax Advance Payment Act, allowing residents to prepay their 2018 county property tax in 2017.
The IRS threw cold water on the effort, however, with a memo that said property taxes paid this year would be subject to the old 2017 rules — but only if the taxes are actually assessed in 2017.
Meanwhile, House Minority Leader Nancy Pelosi on Monday moved to fan any flames of discontent over the new GOP tax law. She has asked House Democrats to “hold GOP tax scam teach-ins across the country as soon as possible.”
“I am writing to reiterate that appeal to members for teach-ins for what this tax scam means to families, and what it means for jobs and economic growth,” Pelosi said in her letter to Democratic members.