Tax bill: States look for ways around the new SALT deduction cap

Curbed ^ | Jan 2, 2018 | Jeff Andrews

[11th_VA]

The new tax bill President Trump signed into law last month hits high-tax, politically blue states like New York and California especially hard because of a new cap on state and local tax (SALT) deductions. But the states hit hardest by the change are already exploring ways around it.

The new law puts a $10,000 cap on SALT deductions. Previously, there was no cap on SALT deductions, which helped high-tax states raise revenue without taxpayers having parts of their income taxed twice, once at the state level and again at the federal level. The new cap means states might have to drop their tax rates or cut spending, lest they face the wrath of angry constituents with suddenly enormous tax bills.

New Jersey Governor-elect Phil Murphy, a Democrat, says his state will explore any and all options to make sure residents of New Jersey aren’t heavily impacted by the new legislation, and elected officials in other states have echoed those sentiments, including pols from New York, California, and Connecticut. Murphy even suggested challenging the law in court on constitutional grounds because of the SALT deduction cap.

The idea that appears to have the most traction, pioneered by economist Dean Baker, is shifting state income taxes to payroll taxes. Currently, payroll taxes are levied on both employers and employees; Social Security and Medicare are funded by a 7.65 percent payroll tax on both the employee and employer side.

The idea to skirt the SALT deduction cap would essentially move state income taxes to an employer-side payroll tax. The part of an employee’s salary that’s taken by employer-side payroll taxes doesn’t count as taxable income, so that tax could still be collected by states but would be exempt from an employee’s individual federal taxation. Also, companies are still allowed to deduct payroll taxes, so the damage to business would be limited.

Proponents say that, in effect, this move would preserve the SALT deduction, as states could lower their income tax rates by the equivalent of a raise in the employer-side payroll tax rate, which is still deductible for companies, while lowering an employee’s taxable income. This idea would hinge on companies not responding by slashing wages to offset their tax hike, but given the tax bill as a whole is a gigantic windfall for corporations, employers might overlook a small setback. Companies also rarely slash nominal wages; instead they may just let inflation erode the value of employee salaries.

Another more radical idea circulating among lawmakers is to change income taxes to a “charitable donation to the state.” These “donations” would result in a state tax credit of equal value, limiting the amount of income subject to federal taxation by the same amount. It would also effectively preserve the SALT deductions.

Both of these ideas would face their own set of obstacles and complications, political and practical, as the changes would domino through the tax code. In hopes of avoiding those pitfalls, lawmakers from states that have yet to legalize marijuana, like New York, have floated the idea of legalizing and taxing marijuana, then lowering state and local taxes to help offset the change.

With so many options being kicked around, the path forward for these states on SALT deductions is unclear. But lawmakers are clearly motivated to mitigate the damage to their constituents.

[Agamemnon]

Trump is not petty about sticking it to "blue" states just to do it. He's strategic.

There are a lot of folks enjoying the situation blue states find themselves in, but like the rest of the world, whose tax systems and socialisms have been artificially propped up by the US's non-competitive tax system (35% until this tax bill), in order to remain competitive, nations will be forced to trim their socialism in order to remain competitive with the US.

Similarly high property/income tax states have lost the artificial "support" of tax deductions of these items against the Federal bill. This will force these states to have to trim their tax bills (and with it their socialism) or risk losing their businesses and tax paying populaces.

I think Trump sees this as another deal to negotiate. Assume that cash repatriation and a 21% Corporate Tax rate brings an economy on fire -- bounty as a consequence of a supply side tax bill is seen everywhere -- simply undeniable. Supply side finally wins the argument against the Keynesian. Bounty enough to more than "pay for" and justify still more national tax relief.

High tax states lost income tax and property tax deductions -- what would they do to get them back? Lower or eliminate the Capital gains tax? How about a top (or flat) personal tax rate of 15%. Lower the Corporate tax to 15% or lower? Or maybe all of them?

Democrats might strangely find themselves on the side of trying the lower their tax burden and might be desperate enough to go to great lengths to do that.

FReegards!

[MIchaelTArchangel]

Too much SALT leads so sclerosis...in this case of the political system rather than of the arteries.

The solution is the same in both cases, lower consumption of SALT.

[Alas Babylon!]

Have the companies pay more!?

Even a little.

What a wonderful idea to drive companies and manufacturers from the blue states to the red!!!

[shotgun]

You forgot to add that if you get a state refund or a federal refund the state will want their share of the federal refund and the feds will want their share of the state refund.

[Tenacious 1]

Sorry. What is a solon? You mean like hair care and nails? $200/year?

I am confused.

[vette6387]

“But lawmakers are clearly motivated to mitigate the damage to their constituents.”

The funny thing here is that the “damage to constituents” has been done by these state’s lawmakers for years. They have had the Federal Government’s allowable deductions as a crutch that has kept the real issue, inordinately high state taxes, from being truly exposed to their taxpayers.
Here in CA, a young couple bought the home across the road from us a little over a year ago for $2.1 million. Under Prop 13, the new property tax assessment will be 1% of the purchase price, plus any voter approved assessments. In looking at my property tax bill, those assessments are $715. So their new annual property tax bill will be about $21,715, which means that they will get $10k taken off the top by the new Federal Tax Law leaving them with $12,000 of non-deductable expense. And of course this also eats up any deduction for state sales taxes which are 8.75% on everything but food and drugs. This new law will have a chilling effect on home sales here as you can see. CA, NY, NJ, and IL are going to have real problems and these “workarounds” they are contemplating will be most likely knocked down by the courts.

[mewzilla]

I hope someone does a study of the budgets of the states that have legalized weed. My bet is that the associated costs have driven up budgets, not the reverse. If so, non-pot-smoking taxpayers will still take it in the shorts, possibly even more so.

[Calvin Locke]

Solon was a wise, ancient Greek law-giver.

Use of "solon" to refer to any given legislator is generally tongue-in-cheek with regards to the "wise" part.

IOW, 99.44% of the time, it's most likely used for veiled disdain or disapproval.

[j.havenfarm]

I agree with you. I think that the legal arguments in the linked article are just stupid. But winning a suit in the long run isn’t the point;’just ask the jokers who brought the “emoluments” case.
You file your lawsuit, get a friendly judge to issue the temporary injunction, and delay the undesired result for as long as possible,
Or just gum up the workings of efficient governing

[ConservativeMind]

They can always move that job outside of the state.

[Katya]

Perhaps states like New Jersey will finally address their crazy property taxes. A few years ago I was debating a move to the NYC area and began looking at areas to live. I was perplexed as to why housing prices were so low in gorgeous New jersey neighborhoods not far from the city... until I saw the property taxes. The property taxes were as high as the mortgage, which explained why the property values were deflated.