In the Know: Federal Tax Reform

Over the past few weeks, Congressional Republicans and President Trump have been outlining the tax-reform “framework” that aims on reducing corporate and individual income-tax rates, simplifying the code and broadening the base. Much of the details are still hazy, but this much is clear: it hinges on the roughly $1.3 trillion that would be raised over 10 years by repealing the state and local income-tax (SALT) deduction, which disproportionately benefits a handful of high-tax state, including New York.

 

Gov. Cuomo very quickly came out to denounce the repeal of the SALT deduction and drubbed it as a form of “double taxation” – although New York State has been selectively double-taxing its residents for many years. Hypocrisy aside, Cuomo’s opposition to the SALT repeal is logical. Even with an expansion of the standard deduction, middle-class New Yorkers might not see a promised tax cut.

 

This would be even worse for the state’s highest-earning 1 percent of taxpayers, who now generate 42 percent of the state’s income tax. A combination of the already high tax environment in New York, and the repeal of SALT deductions, would make lower-taxed states even more attractive. This would be trouble for the state’s finances.

 

For years the SALT deduction has been looked at as a subsidy to high-tax states, in order to decrease the taxes these higher-earning taxpayers who use an itemized deduction. However, despite the SALT deduction, New York has been sending more money to Washington than it gets back – nearly $41 billion more in 2016, according to a report issues by state Comptroller Thomas DiNapoli.

 

The most recent report from the Rockefeller Institute of Government showed that in 2015 New Yorkers paid fully $48 billion more in federal taxes than they got back in federal payments and spending in the state – just .81 cents back for every dollar we sent to Washington. Furthermore, in 2015 the 1.5 million tax filers in Long Island alone paid more in federal income taxes than the 2.8 million tax filers in the entire state of Wisconsin, even though Wisconsin residents reported 20% more in total income.

 

If the federal government fully goes through with the repeal of the SALT deductions, Gov. Cuomo has come out saying that he will sue the federal government. He has gone on to say, “New York will be destroyed if the elimination of state and local tax deductibility is included in any plan.”

 

Both sides of this argument have valid points and a progressive income tax married to a redistributionist budget will always create fiscal winners and losers. However instead of being reactionary and suing the federal government, maybe it’s time for the Governor to look at reforming the New York State tax code to accommodate the federal changes.

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