STUMP » Articles » Theme for the Year: High Tax States Attempting to Avoid Effect of Federal Taxes » 3 January 2018, 04:33

Where Stu & MP spout off about everything.

Theme for the Year: High Tax States Attempting to Avoid Effect of Federal Taxes  

by

3 January 2018, 04:33

Oh, boy.

Let’s take a look at some of the ideas:

Democrats in High-Tax States Plot to Blunt Impact of New Tax Law

Democrats in high-cost, high-tax states are plotting ways to do what their states’ representatives in Congress could not: blunt the impact of the newly passed Republican tax overhaul.

Governors and legislative leaders in New York, California and other states are
considering legal challenges to elements of the law that they say unfairly single out parts of the country. They are looking at ways of raising revenue that aren’t penalized by the new law. And they are considering changing their state tax codes to allow residents to take advantage of other federal tax breaks — in effect, restoring deductions that the tax law scaled back.

*One proposal would replace state income taxes, which are no longer fully
deductible under the new law, with payroll taxes on employers, which are deductible*. Another idea would be to allow residents to replace their state income tax payments with tax-deductible charitable contributions to their state governments.

For the first: how, exactly would that work?

PEOPLE MOVE AROUND

I work in CT. I live in NY. I pay both CT and NY income taxes. NY can’t impose payroll taxes on CT employers.

There are so many people who live in one state and work in another up here: loads of my friends work in NYC, but live in NJ. It’s annoying enough paying income taxes in two states, as it is, but there ya go.

WHAT’S THE BOTTOM LINE?

I decided to look at how much I paid in NY and CT taxes in 2016 (as I already did that return), and compared it against the new standard deduction.

They’re almost exactly the same. Heck, I think the standard deduction will actually be a bit higher for 2018, because my property tax should be dropping by a few thousand dollars (has to do with re-assessment of property in my town, and me having bought at the top of the market).

So I’ve got that standard deduction plus a lower marginal tax rate. I am just fine.

Now, yes, I’m in a one-earner household (though I derive income from multiple sources), and many of my neighbors would get screwed. (For one, my property tax is dropping this year… so the standard deduction is actually a boost! Plus those lower marginal rates!)

Seriously, if NY and CT mess around with this, they are absolutely targeting very rich people. Because it ain’t people of modest income or wealth who are going over a $24,000 in itemized deductions.

ON THAT CHARITABLE DEDUCTION IDEA

This is plain absurd.

Some proposals are more complex. Kirk Stark, a law professor at the University of California, Los Angeles, has suggested that states encourage residents to donate money to their state governments, then let the governments credit those donations against their state income taxes. Such donations would qualify as charitable donations, which are still fully deductible on federal taxes.

Mr. Stark noted that such programs already existed, albeit in a much more limited form. Several states let residents count donations to private schools as state tax payments under certain circumstances, an initiative that conservatives have promoted as a step toward school vouchers.

Here is the handy visual to accompany:

I will leave it as an exercise for the reader as to why paying one’s state taxes in full as a “charitable donation” is not going to fly with the IRS.

Again, I am not a lawyer of any kind, much less a tax lawyer, but it’s not exactly a charitable donation when it’s an amount the state is requiring you to pay in total.

My experience with IRS policy and cleverness has to do with life insurance tax reserves, and when the insurance regulators were developing a complicated way of calculting solvency reserves (which is generally the basis for tax reserves) the IRS said nuh-uh, you’re not getting that one past us.

It’s very technical, but I was impressed with the paper that came out of the IRS — they understood exactly what was going on, and were not about to allow higher tax reserves than are appropriate according to federal taxation principles.

I have an eye for regulatory cleverness, and the one I can definitely say is the hardest to get around is tax.

BACK TO THE PAYROLL TAX

Let’s see that brilliant payroll tax idea again.

Another idea would be for states to partly or completely replace their income taxes with payroll taxes paid by employers, similar to existing taxes for Social Security and unemployment insurance.

In theory, such a move wouldn’t change after-tax income for either companies or individuals. It would just change where the tax checks were coming from. Companies would reduce workers’ pay by the amount of the payroll tax, and would be able to deduct the payments on their federal taxes. Because they would never receive the money, workers wouldn’t be taxed on it.

“In effect, it preserves the state income tax deduction,” said Dean Baker, a liberal economist who has been pushing for the plan.

Both ideas—and others like them—would face logistical hurdles, legal challenges and, most likely, opposition from Congress and the federal government. But they are nonetheless rapidly moving from the realm of academic theory into actual policymaking.

Guess what. Congress can say “nice try” and not allowed these to be deducted any more.

There goes your beautiful theory when non-beautiful politics are in play.

And then the whole unworkable aspect, with many people like me with long commutes currently paying taxes to multiple jurisdictions.

Mr. de León and other legislators concede that they are trying to game the system. But they argue that Congress left them little choice.

“This is highly unusual tax policymaking,” said Mr. de León, who has announced plans to run for the United States Senate next year. “However, this is a highly unusual time in the history of this country.”

Look, you can try to “game the system”, and then Congress can just change the rules again. Don’t think they won’t.

The tax reform bill was the one big political win for Congress, and they’re not about to have California or New York muck it up.

YES, YOU HAVE EXPENSIVE GOVERNMENT

More from the piece:

Still, lawmakers from both parties said it would be hard to cut taxes enough to offset the impact of the new tax law. For one thing, states like New Jersey and New York have high costs of living and high housing costs, not just high tax rates. Even if their tax rates were the same, far more homeowners in New Jersey than in Alabama would hit the $10,000 cap.

But perhaps more significant, cutting taxes would also mean cutting funding for schools, subway systems, anti-poverty programs and other services that residents in those states have come to expect.

“I suppose the rational response for us is to lower our taxes,” said Benjamin Barnes, who heads the Connecticut Office of Policy and Management, “but we have a public that has shown again and again that they expect high levels of service.”

And, more to the point, they’ve got huge pension debts that need to be covered.

So we’re just gonna have to bear it. If we want all this stuff, then we gotta pay for it.

OTHER ISSUES WITH STATE TAXES

From Governing Magazine – state taxes will be a big issue for 2018:

Few developments in Washington will have as direct an effect on state budgeting as the Republican efforts to revise the federal tax code. As of press time, lawmakers were still working to reconcile the House and Senate tax plans. But the Republicans’ priorities are clear.

One of the main GOP goals is to simplify tax returns for most Americans. This would be done in part by increasing the amount of the standard deduction while eliminating certain itemized deductions. The idea is to give taxpayers an incentive to use the uncomplicated standard deduction rather than undertaking the often thorny process of itemizing deductions.

But in the 43 states with their own income tax, the idea has more sobering implications. A dozen states automatically use the same standard deduction as the federal government. They risk losing out on revenue because residents will have less taxable income. Meanwhile, 31 states and the District of Columbia use the federal list of itemized deductions. Congress is considering eliminating a few of those, such as the student loan interest paid and medical expenses. States that stay linked to federal itemized deductions could see revenues increase. This all means that lawmakers in each state will have to determine how their revenue will react to tax reform and whether or not to stay linked to federal tax definitions.

Republican leaders in Congress have also proposed ending the federal deduction for state and local income taxes and capping the deductibility of local property taxes. Proponents argue that this would give high-tax states some incentive to hold down their own rates. But the results might not be so straightforward. In California, for example, the state has a 40-year-old constitutional amendment known as Proposition 13 that artificially caps local property taxes. A new federal tax scheme that favors property taxes over income taxes could spur debate in Sacramento over whether to repeal the measure and lower state income taxes.

These proposed changes to the federal income tax, of course, would not directly impact the seven states that don’t have one of their own. But the more indirect effects of federal tax revision will impact every state.

For instance, some Republicans support eliminating so-called private activity bonds, a move that could affect economic development around the country. State and local governments use these tax-exempt bonds to finance projects built and paid for by private developers. Low-income housing advocates, nonprofit hospitals and infrastructure associations have warned that eliminating private activity bonds would significantly hamper needed projects because it would increase government borrowing costs by as much as 30 percent.

First, obviously they had to write this article before the bill officially got passed.

But here’s a really easy fix for the states in the bolded: their legislators can get off their asses and change their states’ standard deduction.

That was a lazy-ass approach to tax as it was — tying it to federal policy? Why? The deductions change often enough, even with tinkering, that it seems foolish to have one’s state tax policy directly tied to the federal government.

I’m going to write only about the personal income tax stuff, because I have to write about the bigger tax stuff for my job.

SOME PARTING THOUGHTS




So yes, I’m going to keep track of the various “fixes” states like New York and Connecticut will attempt, for my own use if nothing else.

I don’t find this funny, except to the extent they keep coming up with these “clever tricks” that are easily undone… or totally unworkable to begin with.


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