WASHINGTON — It’s a tax provision that could prove costly for schools, police forces, drug treatment centers and other state and local public services.
The sweeping tax overhaul embraced by President Donald Trump and Republican lawmakers would impose a $10,000 limit on the combined sum of property and state and local income taxes that a household could deduct. The $10,000 cap will help pay for corporate and personal tax cuts totaling $1.5 trillion over the next decade.
Conservatives have argued that unlimited state and local deductions amount to a federal subsidy for the wealthy in high-tax states like New York, New Jersey and California. But many middle class families in those states face disproportionately high housing costs and depend on deducting their state and local taxes. These households could soon pressure states and localities to ease their burden by cutting taxes — which would likely force cuts to social programs and public services.
Some Republicans in high-tax states resisted their party’s cap on local and state deductions. Two of them — Reps. Darrell Issa of California and Lee Zeldin of New York — oppose the overall tax measure because of the likelihood that it would hurt their constituents. And despite Republican arguments to the contrary, high-tax states already tend to send more money to Washington than they receive back in federal spending.
“On balance, this bill remains a geographic redistribution of wealth — taking extra money from a place like New York to pay for deeper tax cuts elsewhere,” Zeldin said. “This bill chooses winners and losers in a way that could have and should have been avoided.”
More than 73 percent of homeowners in Westchester County just north of New York City face property taxes alone that exceed $10,000. This means they couldn’t deduct any state or local income taxes. The same is true of half of Manhattan homeowners, a quarter of those in San Francisco, 17 percent of suburban Chicago homeowners and 10 percent of those in Arlington, Virginia, just outside of Washington, D.C., according to figures tracked by Attom Data Solutions.
The limit on the deduction could lead taxpayers there to demand lower taxes or to reject any additional funding requests for state pensions, schools, public safety and health services. What’s more, a separate provision in the Republican tax bill would no longer subsidize employers that help their employees pay their commuter costs. This change will likely increase the cost of public transit for riders.
The overall tax bill would impose new costs on many taxpayers that would outweigh any savings on federal taxes, argues Matthew Chase, executive director of the National Association of Counties.
“We don’t see it as a net gain for taxpayers,” Chase said. “They want to strangle our revenue sources.”
The National Education Association, a teachers union, estimated that the cap on state and local deductions could put at risk $15.2 billion in annual public school spending, or $304 per pupil. Marc Egan, the association’s director of government relations, said the change could discourage local governments from investing in education and might eventually depress economic growth.
“We’re always making the case that investing in education is a common-sense way to grow the economy,” Egan said. “Why Congress continues to resist that on a number of fronts is a mystery.”
Even as Republicans in Congress decided to cap the state and local tax deduction for households at $10,000, their tax bill will continue to allow corporations to deduct their state and local taxes as a business cost.
Since the federal income tax code was introduced in 1913, Americans have been allowed to exclude the taxes they pay to state and local governments. Roughly a third of taxpayers have enough expenses to itemize their deductions. And nearly all who do so deduct their state, local and property taxes. These deductions have helped make it affordable for cities and states to fund school systems, health care services and police forces, while making it more acceptable for a community’s richest households to pay taxes that can help the poorest.
The Republican tax bill nearly doubles — to $24,000 — a family’s standard deduction, which goes to taxpayers who don’t itemize their deductions. So there would automatically be fewer people who would deduct their state and local taxes. But in addition, many households in high-tax states could no longer itemize their deductions because of the new cap on state and local taxes. This could reduce the perceived value of these taxes and incentivize voters to push for lower state and local taxes — a stated goal of some conservatives.
Gov. Bill Haslam has said he thinks the tax overhaul could encourage more people to move from high-tax states to his state of Tennessee, which charges no state income tax.
“We think it actually will encourage both investment growth and population growth in Tennessee,” Haslam said.
High-tax states are already considering adjustments to their policies. Steve Sweeney, president of the New Jersey Senate, has warned that the bill could derail his state’s planned tax increase on millionaires. That idea, estimated to generate about $600 million in revenue, is a central pledge of Democratic Gov.-elect Phil Murphy’s agenda to help raise pension payments and school funding. Murphy has said he is still committed to the tax hike on wealthy earners. But if lawmakers now balk, its prospects become more problematic.
California lawmakers are considering ways to restructure the state’s tax code to limit the impact on its taxpayers, said Assemblyman Phil Ting, a San Francisco Democrat. Speculation has centered on reducing income taxes and raising payroll taxes — in effect, shifting some of the state tax burden from workers to employers.
“We’re looking at a variety of alternatives,” Ting said.
Allowing up to $10,000 of state and local taxes to continue to be deducted, he said, “takes it from horrible to slightly less horrible.”