STUMP » Articles » Taxing Tuesday: New York to Get MORE in Taxes? » 6 February 2018, 05:43

Okay, this is just funny.

The Tax Foundation has done an analysis of the change in federal tax rules on state revenues….that is, if these states don’t change their income tax laws.

Well, they project that New York would get $1.1 billion extra in fiscal year 2019, if the state doesn’t change its rules.

You know what? This is something the state can fix. Sounds good to me.

The New York report actually starts out with an analysis of the “clever” ideas to dodge the federal tax changes for individuals in New York, but let me push that off for a bit.

The issue is conformity with federal tax definitions, amounts, processes, etc.

This one was amusing to me:

Absent any legislative changes, the State would generate approximately $44 million in additional revenue from the increase in the federal standard deduction: taxpayers who previously claimed itemized deductions would be taking the higher federal standard deduction and, thus, be required by state law to claim the state standard deduction.

The state standard deduction is much lower than the federal one. But $44 million is far from $1.1 billion.

However, suspension of federal personal exemptions will have a direct impact on the availability of the state standard deduction for single filers. Under current state law, a taxpayer is eligible for the standard deduction for single filers only if the individual “is not married nor the head of a household nor an individual whose federal exemption amount is zero….” This language is intended to preclude joint filers, head of household filers, and taxpayers that are claimed as dependents on other taxpayers’ returns from claiming the single filer deduction ($8,000 for 2018). Absent a state statutory change, single taxpayers will be required to claim the lower deduction intended for dependent filers ($3,100 in 2018). Approximately 5.2 million taxpayers could see their state tax liabilities increase by $840 million in the aggregate.

Ah, that is more like it.

And then there’s this:

Impact to New York:

The new federal limitation on state and local tax deductions is expected to cost taxpayers in New York an additional $14.3 billion per year in federal taxes. All state and local taxes claimed as an itemized deduction on a federal return are included in the base amount for the purposes of calculating New York State itemized deductions. Because New York requires state itemized deduction calculations to start with the deductions claimed on the companion federal return, the new $10,000 federal cap on state and local tax deductions will substantially
lower the amount of itemized deductions claimed at the state level. Absent any change, the state would see a revenue increase of approximately $400 million. New York State could consider decoupling from the new federal law, effectively restoring current deductibility at the state level. This would require taxpayers to complete a separate Schedule A to calculate state itemized deductions.

Anyway, I expect New York to fix the state income tax so that it becomes more decoupled from federal tax.

If you want to get into all the icky details, you can watch a webinar through here.

LET’S MAKE THIS SIMPLE: NO, YOU CAN’T DO ANYTHING ABOUT FED TAX POLICY

So let’s go back to those “clever ideas”. The Tax Foundation has some messages to those considering such things, like, say, the governor of New York.

More States Considering Dubious SALT Charitable Contribution Workaround:

These proposals are proliferating, but senior Treasury Department officials have been dismissive thus far, with Secretary Steve Mnuchin terming such efforts “ridiculous.” Whatever their political advantages, the IRS will see right through contributions in lieu of taxes schemes and treat the payments as what they really are: tax payments by another name.

New York Taxpayers Must Pay for Ill-Advised Lawsuit Seeking Tax Cuts for Wealthiest Residents

Today, New York Governor Andrew Cuomo (D) announced that New York, New Jersey, and Connecticut are going to court to make the federal tax code more regressive.

Appearing on MSNBC a few days after the federal tax reform bill passed in December, Cuomo slammed it as “a tax cut for the wealthy.” Now he’s spearheading a lawsuit claiming just the opposite and demanding additional benefits for the wealthiest taxpayers.

New York is forming a coalition with New Jersey and Connecticut to sue on (probably) equal protection grounds, arguing that capping the state and local tax (SALT) deduction at $10,000 unfairly and unequally targets taxpayers in certain states.

“This is an assault on those states,” said Connecticut Gov. Dannel Malloy (D). “I believe it is illegal.”

….
The idea here is that capping the SALT deduction disproportionately impacts high-income earners (they’re the ones who earn enough to pay more than $10,000 in state and local taxes), and there are many high earners in New York, New Jersey, and Connecticut. Therefore, that provision is inequitable, because it “targets” wealthy states.

But the fact is that just about every major revenue or expenditure policy has disparate geographic effects.

Social Security and Medicare benefit the states with sizable retiree populations. Housing assistance, SNAP, TANF, and other assistance programs flow predominantly to states with lower-income populations. Defense spending benefits states with large military installations or those that are home to major defense contractors. Corporate income taxes fall most heavily on states which attract large corporations, while manufacturing incentives give advantages to states with manufacturing hubs. These outcomes are inevitable.

When top marginal rates rise, this disproportionately impacts states filled with high earners, but New York didn’t threaten to sue when the top rate rose under President Obama. The creation of the alternative minimum tax hit these states’ residents particularly hard, but in the nearly fifty years since its creation, no state has filed an equal protection lawsuit to abolish it. What about when capital gains rates rise? There’s a lot more capital gains income in New York than there is in, say, Wyoming—yet no lawsuits.
….
These states’ high earners already get the benefit of lower rates and broader bracket widths. Tax reform, by its nature, involves trade-offs, and at its core is a principle so basic as to be clichéd: broader bases and lower rates. That means that targeted incentives are curtailed to help bring down rates, and that’s precisely what happens with the capped SALT deduction. But now New York, New Jersey, and Connecticut want their high-income earners to receive the benefit of the new, lower rates and the old, uncapped SALT deduction, even though curtailing the deduction helps pay for that rate reduction.

This case will almost certainly fail, directing resources to a fruitless endeavor that forecloses more productive uses of taxpayers’ money.

For years, many of these same politicians claimed that tax rates don’t affect migration or economic decision-making. Now they’re willing to remake their tax codes and sue the federal government to shield their highest-income taxpayers from the consequences of their own high tax rates.

Mmm hmm.

My own response:

Thanks for wasting my tax money on this idiocy. I know you'll screw up taxes for those of us who get, at worst, a wash on the federal tax bill. You can't control the feds— focus on NY. Cut our costs.

— Mary Pat Campbell (@meepbobeep) January 28, 2018

THE SURE-TO-LOSE LAWSUIT

Don’t take my or the Tax Foundation’s word for it.

Let’s go to Governing magazine, which tends to be even-handed:

3 States Plan to Sue Over New Tax Law. Here’s Why They Might Lose.

Connecticut, New York and New Jersey say that GOP tax policies unduly punish their populations. Some doubt whether their claims would stand up in court.

Governors from three Northeast states have announced plans to sue the federal government for discriminating against their taxing structure. But tax experts say their legal justification for doing so seems dubious at best.

The heads of state of Connecticut, New Jersey and New York have announced plans to file a joint lawsuit claiming that the federal government’s new cap on deductions for state and local taxes, put in place by the Republican tax overhaul plan signed into law last month, is unjust because it targets wealthier states. Although no legal strategy has been announced, statements made by New York Gov. Andrew Cuomo suggest the lawsuit could use the U.S. Constitution’s equal protection clause and the 10th Amendment protecting states’ rights.
…..
“It has nothing to do with sound policy,” New Jersey Gov. Phil Murphy said while announcing the impending lawsuit. “It is clear: It is punishment.”

But Congress has nipped and tucked the state and local tax deduction before.

When the federal income tax was first instated in 1913, all state and local taxes not directly tied to a benefit were deductible against federal taxable income. Then in 1964, Congress limited deductions to property, income, sales and motor fuel taxes. Fourteen years later, motor fuel taxes were eliminated from qualifying. And in 1986’s tax reform, sales taxes were eliminated from deductibility — a move that disproportionately impacted taxpayers in states with no income tax. In 2005, Congress reinstated the sales tax deduction but only allowed taxpayers to deduct either income taxes or sales taxes (not both).

Oh look.

Betsey McCaughey on the lawsuit:

Tri-state govs’ tax lawsuit is just a desperate scam

The governors of New York, Connecticut and New Jersey joined forces last week to announce they’re suing Uncle Sam. They’re trying to torpedo the new $10,000 ceiling on how much state and local taxes their residents can deduct when paying federal income taxes.

The three men sounded like buffoons, making far-fetched claims that the $10,000 cap violates the US Constitution. Nonsense. The lawsuit is a PR stunt to fool high earners in their states into thinking relief is on the way.
…..
In New York, the top 1 percent of earners provide 42 percent of the state’s income-tax revenue. These high earners deducted $500,000 a year on average for state and local taxes. As of Jan. 1, their deduction is capped at $10,000, making it painfully expensive for them to continue living in New York.

Likewise, New Jersey’s top 1 percent of earners provide 40 percent of that state’s income-tax revenue. If they leave, the Garden State goes kaput.

The governors are worried the 1-percenters will flee to low-tax states. After all, New Yorkers bear the highest state and local tax burden in the nation. Connecticut and New Jersey are almost as bad. Seven states — including Florida and Texas — don’t tax income at all. Why live in tax hell if you can move to tax paradise?
……
The 16th Amendment, which empowers the federal government to tax income, clearly states the burden does not have to be apportioned among the states in any particular way.

As for deductions, Cuomo, New Jersey Gov. Phil Murphy and Connecticut’s Dan Malloy would have you think deducting state and local taxes is a “right” under the Constitution. No way. The alternative-minimum tax already eliminated these deductions for many filers without any constitutional problem.

The US Supreme Court has ruled deductions of all kinds are a “legislative grace,” totally up to Congress.
…..
Unlike the 1-percenters, most residents of New York, Connecticut and New Jersey are benefiting from the new federal tax law. The near doubling of the standard deduction, together with lower rates and other changes, more than offsets the cap for them. Only 34 percent of New York filers and 40 percent of Connecticut and New Jersey filers itemized before the new tax law, and even fewer will after.

I’m definitely not in the 1% in New York, though I am high income. I have estimated that I may have, at worst, a wash on the federal taxes.

These lawsuits are to protect extremely high income people… so these states can grab as much tax revenue from them as possible. There goes their precious millionaires taxes, if the millionaires can’t deduct them.

A SIMPLE PROPOSAL TO MAKE FEDERAL TAX POLICY FAIR VIS-A-VIS THE STATES

Anyway, I have an extremely simple (some may say modest) proposal that would be fair to all states: no state/local taxes deductible at all from federal taxes.

After all, the states don’t deduct my federal taxes when they consider taxing me. All states can pursue their own tax policy without having to worry about the feds. Just set policy, and let things fall where they may.

From the Governing piece:

“So, over the years, Congress has apparently felt like they could narrow the deductibility,” says Thomas Gais, director of the Rockefeller Institute of Government. “I’d assume they imagine they can get rid of the whole thing if they wanted to.”

Yes, I know it’s not a difficult proposal to come up with. Some may say it’s pretty damn obvious.

Indeed, no one is disputing the fact that capping how much taxpayers can deduct in state and local taxes from their federally taxable income makes it harder for high-tax states to raise taxes in the future. But Walczak and Gais both said they doubt that amounts to a 10th Amendment violation of a state’s right to govern itself. They note that if anything was going to crowd out states’ ability to raise taxes, it would have been during the 1950s and ’60s, when the federal top marginal income tax rate was 91 percent.

That’s not fair. It’s for the states to tax the rich. How dare the feds horn in on the states’ turf.

Anyway, I call for a decoupling of federal and state tax policy.

It’s called federalism.

I figure it’s worth a try.