Jim Dey: Politicians' SALT-iness over tax law steeped in irony

Jim Dey: Politicians' SALT-iness over tax law steeped in irony

"Although the recently enacted federal tax law will reduce income liability for the overwhelming majority of taxpayers, some states are chafing at the new $10,000 cap on the state and local tax deductions." — Jared Walczak, an analyst with the Washington, D.C Foundation.

Chafing? They're not chafing. The governors of the states most affected are enraged.

New York Gov. Andrew Cuomo has vowed to challenge the constitutionality of the recently passed federal tax law that limits itemized deductions for state and local taxes (SALT) to $10,000.

"We believe it is illegal," he said, although that's a distinct minority opinion among tax-law experts.

Meanwhile, in California, Gov. Jerry Brown and state legislators have raised the idea of replacing nondeductible state and local taxes with charitable donations that would be deductible.

Then, there's Illinois, where Gov. Bruce Rauner describes the new limit on state and local tax deductions as "punishing."

"It's going to hurt a lot of middle-class families and higher-income families, and it's going to push more employers out of the state. That's going to hurt job creation, and that's going to increase the cost of living for the people of Illinois," he said.

Rauner said the change in the tax law makes it even more necessary for the General Assembly to embrace his economic reform package that includes a freeze on local property taxes, a position that Democratic House Speaker Michael Madigan most certainly will reject.

Irony abounds in this debate about the controversial tax bill, which President Donald Trump signed into law after congressional Republicans passed it last month over unanimous Democratic opposition.

A steady stream of criticism was leveled at the legislation because critics contend it unfairly benefits the rich. But much of the criticism of the bill is aimed at the new limit on the SALT deduction, a benefit that historically benefits upper-income earners.

Here are a couple of numbers that demonstrate how narrowly targeted the new limit on SALT deductions is.

The Tax Foundation reports that in the 2014 tax year, just 30 percent of taxpayers itemized their deductions rather than taking the standard deduction. Because the new legislation doubles the standard deduction, the Tax Foundation estimates that even fewer tax filers will have a financial incentive to itemize under the new law.

"About two-thirds of taxpayers who itemize now won't be itemizers under the new tax bill," said Scott Greenberg, a senior analyst with the Tax Foundation. "I don't see the $10,000 cap on the SALT deduction affecting more than 10 percent of returns. I'd bet it's less than that."

Whatever the number turns out to be, it's the taxpayers, not the states where they live, who will pay.

Taxpayers still will owe the same amount of money to state and local governments. But because of the limit on the SALT deduction, they will owe more money to the federal government.

In other words, it's a tax on the "millionaire and billionaires" so many populist politicians rail against. The greater their incomes, the more money the SALT-deduction limitation will cost them.

Affected taxpayers have noted the new rules and acted accordingly. Many prepaid in 2017 the property taxes they would have paid in 2018 so they can get the full benefit of the SALT deduction before it's limited.

The savings could be significant.

For a taxpayer in the 35 percent tax bracket, a fully deductible $20,000 local property-tax bill would generate $7,000 in federal tax savings. Now that higher-income taxpayer who pays $20,000 in property taxes and another $20,000 in state income taxes will see what would have been a $40,000 deduction, worth $14,000 in federal tax savings, limited to $10,000, worth $3,500 in federal tax savings.

So why are the governors in high-tax states crying over the rich?

Actually, they're not. They're crying for themselves because the new $10,000 SALT-deduction limitation will make it more difficult politically to raise taxes on upper-income families.

Higher-income earners are already paying a disproportionate share of federal and state income taxes, and they won't be happy if they're asked to pay even more in state and local taxes on top of the higher federal taxes they'll be required to pay.

"It's not hard to imagine why some states would be unhappy that their subsidy is being taken away," Greenberg said.

Take Illinois, a state in dire financial straits after years of financial mismanagement.

Legislative leaders are proposing an amendment to the Illinois Constitution that would replace the state's flat tax, currently levied at a 4.95 percent rate, with a progressive income tax plan that would allow escalating tax rates on escalating levels of income.

Illinois Revenue Department figures show that in 2013, just 32,000 out of 6 million tax filers reported annual incomes between $1 million and $25 million. This infinitesimally small percentage of people paid $2.5 billion — about 15 percent — of the $16.9 billion in income tax revenue that year.

How thrilled are they and other high-income earners going to be when Madigan & Co. ask for even more?

Noting the dilemma public officials in Illinois face, the Chicago Tribune recently made a tongue-in-cheek suggestion that, instead of constantly raising taxes, public officials might consider reducing the size and cost of government in the Land of Lincoln.

"We know, crazy talk. There are public employee unions to reward for the money and muscle they devote to re-electing friendly pols. They are interest groups that want high taxes and more spending, not lower and less. There are governments that rely on rising revenue to employ precinct captains, nieces, brothers-in-law and other connected payrollers," the Trib stated.

Jim Dey, a member of The News-Gazette staff, can be reached by email at jdey@news-gazette.com or by phone at 217-351-5369.

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