The IRS last week announced new rules forbidding high tax states like New Jersey, New York and California from implementing gimmicks to shield their wealthy residents from federal taxes.
It outlawed nascent state maneuvers to try to bypass the new state and local tax (SALT) deduction limit of $10,000 that took effect this year as part of new federal tax cuts. The wealthy in high-tax states have long used SALT to reduce their federal tax liability. And high-tax state legislators have long relied on SALT to blunt the impact of their tax-and-spend policies.
In a desperate attempt to make their high tax rates more digestible with less SALT, several states have tried enacting dubious provisions to allow residents to claim their state taxes as charity, making them eligible for a full federal tax deduction. In New Jersey, Gov. Phil Murphy signed legislation to allow municipalities to start “charitable funds” to which residents can donate in return for a 90 percent property tax deduction.
While the IRS has already indicated that it would forbid this practice and other similar gimmicks, last week’s rules remove all doubt. This will only increase the anger of blue state legislators, whose donors will now be exposed to the full effects of their high-tax policies. (The $10,000 SALT deduction vestige will protect working-class taxpayers in these states from paying higher taxes.)
New York Gov. Andrew Cuomo recently said that the Republican curtailment of SALT deductions “is totally repugnant and hypocritical of the fundamental conservative ideology which they preach.”
The proposed tax reform would eliminate the state and local tax deduction. Many New Yorkers may opt out of purchasing a home if the deduction is eliminated. Natasha Vaughn, Albany Bureau
As if it weren’t already clear, Gov. Cuomo doesn’t know the first thing about conservative principles. Lowering tax rates while eliminating special loopholes and deductions that benefit the rich, like SALT, has been conservative orthodoxy for generations.
The SALT deduction limit eliminates two immoral wealth transfers:
- First, it eliminates the federal tax subsidization of high-tax states by low tax states. According to the Tax Foundation, California and New York together make up about one-third of national SALT deductions.
- Second, it eliminates the federal tax subsidization of wealthy taxpayers by ordinary ones. Over 90 percent of those earning more than $200,000 a year take advantage of the SALT deduction to artificially lower their federal taxable income.
In the short-term, curtailing the SALT deduction will raise the overall tax burden on many blue state residents. This will likely accelerate the ongoing domestic population outmigration from high-tax states California, New York, New Jersey, Connecticut and Illinois to low-tax ones. These states have lost hundreds of billions of combined adjusted gross income since 1992, according to the website HowMoneyWalks.com, which aggregates IRS data. In contrast, Nevada, Washington, Florida and Texas, all of which have zero state income tax, gained roughly the same amount as their populations have surged.
In the longer term, the curtailed SALT deduction will act as a powerful check on the tax-and-spend habits of blue state legislators because residents will feel the full effects of their policies. In fact, this is already occurring. New Jersey’s Gov. Phil Murphy campaigned on a promise to impose a “millionaires’ tax.” But the Democratic president of the state Senate, Steve Sweeney, said in November that New Jersey needs to “hit the pause button” because “we can’t afford to lose thousands of people.”
His next words could have come from Heritage Foundation economist Steve Moore: “You know, 1% of the people in the state of New Jersey pay about 42% of its tax base. And you know, they can leave.” (The state ultimately raised taxes on those earning $5 million or more.)
Last October, 36 California Democrats in Congress wrote to GOP leaders: “The elimination of SALT would pressure state and local governments to make cuts and take in less revenue.” For beleaguered Golden State taxpayers, that means long-overdue relief.
President Ronald Reagan called the SALT deduction “the most sacred of cows.” It took President Donald Trump and the Republican Congress to finally slay it. As the IRS confirmed last week, the SALT deduction will force New Jersey and other high-tax states to rethink their taxing policy – a major victory for their taxpayers.
Alfredo Ortiz is president and CEO of the Job Creators Network.