Why Did the Governor of New York Say the GOP's Tax Plan Would Destroy the State?

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On Oct. 26, a politician took to Twitter to write a scathing Tweet -- and no, it wasn't Donald Trump. This time, it was Andrew Cuomo, governor of New York.

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Cuomo fired off a Twitter missive commenting on the tax reform plan the GOP was rumored to be proposing. Cuomo's warning: "New York will be destroyed if the deductibility of state and local taxes is included in any final plan that passes the House."

If you haven't been following the debate over tax reform closely, you might be wondering how a federal tax plan could be so damaging to New York. We have the answer -- and it's not just New York that's likely to be affected, but also other high-tax liberal states such as California, Connecticut, Maryland, and Massachusetts. 

Why is the governor worried about the GOP's tax plan?

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Gov. Cuomo's Tweet was a warning about the affects that New York would feel if the GOP went forward with a proposal to end state and local tax (SALT) deductions

Under the current rules, when you pay state income taxes, state sales taxes, and local real estate and property taxes, you can deduct the amount you pay from the income that's subject to federal taxes. It's a way of allowing you to avoid double taxation on that income. You must itemize your deductions to claim SALT deductions.

Without the deduction, you're taxed by the federal government on money you paid the state, making local taxes much more expensive. If you deduct $10,000 in state taxes and you're in the 25% tax bracket, you save roughly $2,500 on your federal tax bill. That means you have a lot to lose if SALT deductions are eliminated.

Why would this hit New York so hard?

In 2013, around 44 million taxpayers itemized their deductions, and around 43 million of them took the SALT deduction. Close to one-fifth of all tax filers claiming the SALT deduction came from New York and California, according to the Tax Policy Center.

Liberal states like New York and California tend to tax residents at higher rates to provide more social services, which means residents of these states are more likely to take big deductions from their federal taxes for all the local taxes they pay. They also have a disproportionate number of wealthy people who are more likely to itemize and take advantage of SALT deductions.

Because so many New Yorkers deduct state and local taxes from their federal returns, losing those deductions would cause a tax increase for New Yorkers across all income brackets. The average tax increase for New Yorkers would come in at around $5,298. Families making less than $50,000 would see an expected tax increase of $423, while wealthier families with incomes between $300,000 and $500,000 would see their taxes go up by $12,753 on average, according to a New York State Department of Taxation of Finance analysis of 2010 data.

Will New Yorkers take a hit?

Gov. Cuomo tweeted his concerns about the impact of the proposed GOP tax plan before the official tax plan had been released. When House Republicans' tax reform bill was presented on Nov. 2, it contained a compromise on SALT deductions. Rather than eliminating these deductions entirely, it eliminates the deduction for all state and local taxes except real estate taxes, and it caps the deduction for real estate taxes at $10,000.

However, the U.S. Senate released its own proposal for tax reform, and the Senate bill does entirely eliminate the SALT deduction -- which is the catastrophic scenario Cuomo was talking about in his tweet. 

Even the compromise plan could be bad news for New Yorkers, as many New Yorkers -- and other residents of high-tax states -- are still likely to take to take a big hit. New York had the highest local tax burden of any state in the U.S. in 2017, with New Yorkers paying 12.94% of total personal income in state income taxes, property taxes, excise taxes, and sales taxes. Renters will no longer be able to deduct any portion of these taxes they pay locally under the House plan, while many property owners would lose a good portion of their deductions as well.  Of course, for New Yorkers to lose their deductions entirely under the Senate plan would be much worse.

Will tax reform pass?

Although New Yorkers have legitimate reason to worry, it's unclear whether tax reform will pass in its current form -- or at all. While the House of Representatives passed its tax reform bill on Nov. 16, the fate of tax reform in the Senate is far murkier, especially as Republican Senator Ron Johnson has already indicated that he's a "no" vote on the bill in its current form. For the bill to pass along party lines, all but two Republicans must vote for it -- and no Democrats are expected to back the GOP's plans.

Compounding the GOP's problems, there is staunch opposition from powerful political interests, including the National Association of Home Builders, to reducing or eliminating SALT deductions.

The GOP may decide that keeping this source of revenue isn't worth the headache and may spare New York from the destruction that Cuomo has predicted will be forthcoming.

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