Skip to comments.Tax bill: States look for ways around the new SALT deduction cap
Posted on 01/03/2018 7:57:03 AM PST by 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 arent 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 employees salary thats taken by employer-side payroll taxes doesnt count as taxable income, so that tax could still be collected by states but would be exempt from an employees 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 employees 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.
In a perfect world, Blue State Rats would try this, and it would go to the SCOTUS for a ruling. And SCOTUS would say, based on the Obamacare Ruling, it's still a TAX - LOL !!!
Here is the text of the Sixteenth Amendment to the U.S. Constitution:
Amendment 16 - (Passed by Congress July 2, 1909. Ratified February 3, 1913) - The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration.
It should not take a "constitutional scholar" to see that the new federal tax law is NOT unconstitutional.
And to think, it was "progressives" who pushed for that stupid amendment in the first place...
This would be a gift for those who don't smoke pot. They would see their state taxes go down without having to pay any type of offset.
A charitable donation to the state is voluntary. This proposal is nothing more than a legal fiction.
When bammy raised taxes, the left did nothing! they loved the idea! May they all go to hell.
Why don’t they just repeal their state income tax? Easy solution. But then of course, the takers would have to be responsible and get jobs....
——”New Jersey Governor-elect Phil Murphy, a Democrat, says his state will explore any and all options to make sure residents of New Jersey arent heavily impacted by the new legislation, ———”
Ummm, maybe NOT having the highest property taxes and most corruption in the country is where you should start? Morons...this lunacy is reaching new levels by the hour!
Last line of post has YUGE #RustyIrony! LOL!
“But lawmakers are clearly motivated to mitigate the damage to their constituents.”
Translation: Lawmakers are clearly motivated to mitigate the damage to their own sorry political arses!
If they really “cared for their constituents” they would have never raised taxes to such high levels!
Liberalism = theft!
Id absolutely LOVE watching blue states change their income taxes to charitable donations.
If these donations are MANDATORY, the IRS (and Supreme Court - thank you John Roberts) would consider them a tax and, thus, limited by the $10,000 SALT ceiling.
If they are NOT MANDATORY (and thus possibly deductible as charity donations), well be laughing our asses off watching how few deep state tax payers contribute as much as a penny.
Even better, and entirely possible, is that SCOTUS could rule that a "Charitable Contribution" is VOLUNTARY and the deep blue slime states have kissed their income and property taxes goodbye.
If the “charitable contribution” is in any way mandatory, the SCOTUS will have no problem calling it a tax. If it is voluntary, the states will see very little revenue from it. If any.
The better option appears to be the employer contribution of the payroll tax. It still has drawbacks; the employer contribution is a cost-shifting measure that increases the cost of employment and still reduces the income to the employee. It will exert a downward pressure on incomes in states that already have very high costs of living.
From the article:
“...This idea would hinge on companies not responding by slashing wages to offset their tax hike, ...”
Also hinges on companies not moving out of state.
Yeah, businesses would docilely go along with tax hikes that would offset the gains of tax reform. Sure fire way to drive more businesses out of the high tax blue states.
And what about the self-employed who would have to pick up both?
President Trump is slowly taking apart the left and they are not even aware of it.
California pretends state law over rules Federal Law when it comes to border control. The day is coming that will show just how powerless the state is when it goes head to head with the Federal Government.
“without taxpayers having parts of their income taxed twice”
Now that’s a blatant lie!
Here’s how income IS taxed twice: the federal tax is a percentage of your gross. the state tax is a percentage of that SAME F*CKING GROSS! You don’t get that gross! It was reduced by taxes. The state tells you that it’s taking, for example, 7% of your gross. But you didn’t see that gross. The f*cking federal government took its cut! The “7%” is more than 7%! Your gross is being taxed twice.
F*CK the left.
The other idea, pioneered by a$$hole Dean Baker is even worse! The fool proposes to tax the employer on wages paid to employees. 1. That would be a deduction for the employer. 2. the employer would be paying the tax and would just reduce wages by an equivalent amount, or not, and go out of business. If the employee gets a lower wage, he is STILL paying the f*cking money!. I swear, the biggest idots are economists!
So the solution is to help the taxpayers buy burdening the businesses in their states more. This makes the products produced in those states more expensive and less competitive internationally and nationally. If history is reliable, this should motivate more businesses to relocate to be more competitive. This in turn will shrink the tax base and reduce jobs in the state. This should require the blue states to raise taxes again....
And the cycle repeats itself as the tyrannical blue governments simply cannot control their own spending and/or relenquish authority over its subjects.
And all this time I thought dems were on a never ending quest to tax the rich
Very good point which I should have realized, being self-employed. It depends on what the tax code says about payroll taxes and whether they are a deductible business expense. I’m not a tax lawyer, but my guess is that if you are a sole proprietor, you get screwed with no deduction. But if you incorporate, the “corporation” (which is you) gets to take the corporate payroll deduction.
But it would appear to have the potential of penalizing the self-employed. Right now the Federal government gives the self-employed a number of benefits. For example, I get to deduct the employer’s contribution to social security off my personal income. I also take can take a business deduction for my health insurance premiums (which are staggeringly high to begin with).
States, not so friendly.
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