For Every Dollar New York Sends to Washington, It Gets 81 Cents Back

By Laura Saunders Features Dow Jones Newswires

New York, New Jersey and Connecticut give more per resident to Uncle Sam and receive less back than any other states. Their residents will also be hit hardest if Republican lawmakers in Congress repeal all or part of the deductions for state and local taxes.

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The repeal of SALT -- or state and local tax -- write-offs is a centerpiece of the current tax overhaul for both fiscal and ideological reasons. Eliminating the deductions that individuals get for state income, sales and property taxes could raise more than $110 billion a year.

Supporters of SALT repeal want to redeploy these funds in ways they argue will boost economic growth, such as by cutting taxes on businesses. They also argue that these deductions encourage waste by blunting the pain of high state and local taxes.

In October, House of Representatives Speaker Paul Ryan (R., Wis.) told a group at the Heritage Foundation that the SALT deduction is "propping up profligate big-government states."

Opponents of SALT repeal said the change would add to a burden that is already distributed unevenly among the states.

The change would "cut taxes for everybody else and send my constituents the bill," said Rep. Dan Donovan (R., N.Y.), who represents Staten Island and part of Brooklyn and voted against the House's tax bill. "For every dollar New York sends to Washington, we get $0.81 back,"

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Rep. Donovan was referring to a study unfamiliar to many.

Originally sponsored by Sen. Daniel Patrick Moynihan, (D., N.Y.), the study examines the "balance of payments" between each state and the federal government. The research is overseen by economist Don Boyd and published by the Rockefeller Institute of Government at the State University of New York in Albany.

The most recent update of the study, based on federal fiscal year 2015, concluded that 13 "donor" states sent more money to Washington per resident than they received in federal spending, while the remaining states got more than they gave.

The top donor states were New Jersey, Connecticut, and New York, while the top recipient states were New Mexico, West Virginia, and Mississippi.

To reach these conclusions, Mr. Boyd and his staff examined federal data to determine how much each state received per resident from spending on everything from federal salaries to military contracts to Social Security and Medicaid payments. Then they compared that with what each state sent to Washington in taxes, per resident, and determined a net positive or negative number.

The apportionment involved messy calls, such as deciding how corporate taxes should be divided between labor and shareholders, or how to reconcile differing federal data sources. Mr. Boyd explained his methodology in the study.

"It's a valid exercise, and it's relatively accurate. New York and California are sending far more to Washington than they're getting back, " said Stan Collender, a budget specialist with MSL Group in Washington.

The study's results also provide context for the idea that SALT deductions are subsidies to high-tax states. "What the donor states give to Washington swamps the benefits they get from state and local tax deductions," said Mr. Boyd.

For example, SALT deductions provided a benefit of $802 per resident in Connecticut in 2016, according to a study by the Tax Policy Center. The year before, the state sent Uncle Sam about $2,763 more per resident than it received.

Other states where residents would be hit hardest by a SALT repeal are among the largest donors, including New Jersey, New York, Massachusetts, Illinois and California. The 2016 Tax Policy Center study looked only at the effect of SALT repeal or reform, not at the net effect of broader tax-overhaul provisions similar to the ones Congress is now considering.

Rep. Donovan and lawmakers from donor states don't think this outcome is fair and are fighting the legislation.

Scott Greenberg, an analyst with the Tax Foundation, disagreed. He said donor states are the richest ones, and by design the income tax imposes higher marginal rates on their residents who have higher incomes.

"Our tax system is intended to transfer money from richer states to poorer ones. State and local tax deductions shouldn't undermine that goal," said Mr. Greenberg.

At this juncture a repeal of SALT deductions isn't a foregone conclusion. What is known is that lawmakers need more revenue for the broader tax plan to work and a repeal of SALT deductions would provide funds.

Write to Laura Saunders at laura.saunders@wsj.com

(END) Dow Jones Newswires

November 29, 2017 13:18 ET (18:18 GMT)