One of the aspects of the new federal tax plan that made sense to me was the elimination of much of the deduction for state and local taxes. While the move cost those of us in higher tax states, it finally forced states to stop using the federal tax laws to effectively subsidize its high tax policies. Now that bill has come due in New York where taxpayers will no longer be able to write off their high state taxes. The result is not only a shortfall of $2.8 billion but droves of wealthy taxpayers leaving the state.
There has long been a valid concern over states like New York approving higher and higher taxes while assuring voters that they will not really pay the full cost since they can write it off on their federal tax bill. Taxpayers have complained that they are effectively subsidizing taxpayers in states like New York and California even though they often make considerably less. I have come to support the approach for a different reason. It forces local politicians to bear the true costs of tax hikes since they can no longer dismiss objections by saying that their increases will simply be recovered as a deduction on federal taxes. California legislators responded by trying to push legislation to force businesses to give back half of their federal tax savings.
In New York, the legislature is still pushing to add spending to the budget as Gov. Andrew M. Cuomo announced the need to slash the budget. He referred to the reality of the budget as a “heart attack.” If so, it was a heart attack years in the making from an effectively subsidized bloated tax system.
While New York was outraged by the tax change, it will finally have to deal politically with its own tax policies rather than have people in Nebraska effectively help pay for New York programs.
The new tax law caps the deduction at $10,000 for state and local taxes. That will hit the most wealthy taxpayers in states like New York. Cuomo noted that this top one percent also happens to be highly mobile and pay half of the New York’s taxes.
It is an ironic moment. While Democrats routinely complain that the rich are not paying their fare share, this one percent covers half of their taxes. Now they may be leaving. That will require either cuts in the budget (which is already being opposed) or higher taxes on the remaining wealthy. . . which is likely to result in more leaving in a vicious circle.
To his credit, Cuomo acknowledged the problem: “This is the flip side. Tax the rich, tax the rich, tax the rich. The rich leave, and now what do you do?”
What you do is adopt a tax system that can be sustained without federal subsidy and to take responsibility for your own budgetary decisions. Cuomo seems to be doing so but he is already facing opposition.