The real ‘trickle down’ effect of the GOP tax bill: state and local government taxes

State officials worry that all the economic progress in recovering from the Great Recession is about to be undercut by the $1.5 trillion Republican tax plan sailing through Congress. The New York Times reports, States Warn of Budget Crunch Under Republican Tax Plan:

While lawmakers say the plan will boost growth and strengthen the economy, Oregon state officials say the bill could have the opposite effect by making the state a less affordable place to live and putting a squeeze on state and local budgets.

“What I am concerned about is that this will impede our forward momentum,” Gov. Kate Brown of Oregon said in an interview. “This tax plan will basically burst the balloon that’s happening here.”

Oregon is not alone in its concerns. State and local officials in other high-tax, largely blue states like New York, New Jersey and California are warning the tax plan will strain budgets, shake real estate markets and prompt residents to flee expensive coastal states for places with lower taxes.

Of primary concern is the Senate’s plan to repeal the state and local tax deduction, which currently allows people who itemize their tax returns to deduct state and local income, sales and property taxes paid. The tax break is claimed by people across the nation, but is more heavily utilized in higher-tax states like Oregon, California, New Jersey and New York. Eliminating the deduction has long been a goal of many Republican lawmakers, who view the tax break as a subsidy that poorer red states provide to richer blue ones that spend heavily on government services.

This is misleading. Poorer red states (recipients) are more financially dependent upon the federal government than richer blue states (donors), they get back more in federal dollars than they pay in taxes. See WalletHub’s 2017’s Most & Least Federally Dependent States.

Most Federally Dependent States

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Arizona ranks number 11 among most federally dependent states.

A report this month from Fitch, the credit rating firm, warned that repealing the state and local tax deduction would hit residents especially hard in states such as California, Connecticut, Massachusetts, New Jersey and New York. That could put pressure on state governments to reduce taxes — an uncomfortable proposition for states that are just recovering from the deep fiscal strain they faced during and after the recession.

Most states are not in a position to lower taxes in response to the federal tax increase due to tepid revenue growth and ongoing spending pressures,” analysts at Fitch said.

In Oregon, which has one of the highest state income tax rates in the country, roughly 30 percent of taxpayers would see their federal tax bills increase by an average of $573 with a full repeal of the state and local tax deduction, according to Oregon’s legislative revenue office.

Ms. Brown, a Democrat, said repealing the deduction will put pressure on state officials to reduce taxes at a time when Oregon is already fiscally stretched in providing education, law enforcement and other services to its residents.

“We are already struggling to pay for basic services,” said Ms. Brown, who acknowledges that her team has not been able to fully analyze the scope of the legislation because it has been moving and changing so rapidly. “For Congress to move so quickly on a ginormous tax policy like this that has extremely far-reaching impact is just crazy.”

Such worries are widespread and they come at a time when state budgets are being squeezed despite a steady economic upturn nationally. Economists attribute the shortfalls to a mix of slower sales tax revenues and ill-advised tax cuts in some states combined with a hangover from the recession. [See Arizona, So how’s that trickle-down working out for Arizona? The Arizona Legislature’s budget analysts predicted a budget shortfall that could top $100 million in the current and coming year as the impact of corporate tax cuts continues to overwhelm increases in sales, insurance premium and personal income tax collections.] The Trump administration has also called for budget cuts that would shift more responsibility to the states to provide for their residents. And overhauls to welfare programs such as Medicare and Medicaid could follow if Republicans succeed in cutting taxes.

The full repeal of the deduction, often referred to by its acronym, SALT, is not a foregone conclusion. Senate Republicans want to eliminate it completely, saving about $1.3 trillion over a decade, while House Republicans have agreed to maintain a deduction for up to $10,000 in property taxes. The two plans ultimately must be aligned before legislation can be passed and sent to President Trump’s desk for signing.

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New York Democrats have estimated that nearly a third of the state’s taxpayers will see their federal tax bills rise by more than $3,000 if the state and local tax deduction is eliminated. They also have pushed back against the argument from Republicans that New York is being subsidized by the federal government, pointing out that the state sends $41 billion more in tax payments to Washington than it received in federal spending last year.

In California, the state budget is projected to top $180 billion this year, but local officials say that scrapping the state and local tax deduction could mean that some plans for large-scale projects and investments could have to be curtailed. According to an analysis by the California Budget and Policy Center, California K-12 schools could lose $4.6 billion per year without the state and local deduction because the state will struggle to raise revenue when it needs to down the road. The funding of infrastructure projects, they say, could also stall.

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Belt tightening at the state level may also trickle down to cities and towns.

In New Jersey, state funding has been critical to assisting Atlantic City in its revival efforts after several casinos closed and its economy cratered three years ago. However, lawmakers in the state said last week that the incoming Democratic governor, Phil Murphy, would likely have to rethink the tax increase on the wealthy he has been considering if such taxes are no longer deductible on federal taxes.

As they have in other states that would be punished by the repeal of the deduction, even Republicans in New Jersey are urging the House and Senate to think twice about the ramifications of repealing the state and local tax deduction.

Mayor Don Guardian of Atlantic City, a Republican whose term concludes at the end of the year, said that repealing the deduction would primarily hurt middle class homeowners across the state who currently itemize their tax returns and benefit from writing off those taxes.

More on the local government effects from the Washington Post. In towns and cities nationwide, fears of trickle-down effects of federal tax legislation:

[I]n small towns and thriving cities, in Republican- and Democratic-leaning states, local leaders are warning that the $1.5 trillion tax legislation moving through Congress threatens to undermine their ability to raise money for government services, including police and schools. The Republican measures would eliminate or severely curtail taxpayers’ ability to lower their federal tax bill by deducting the cost of their state and local taxes. Without that offset, local leaders say, taxpayers will begin to seek relief closer to home, potentially making it more difficult to provide basic services.

The House passed a bill that would severely curtail the tax deduction, allowing people to deduct only up to $10,000 in property taxes from their federal returns, while the Senate is moving a bill forward that would eliminate it.

“I am hearing from our members across the country,” said Irma Esparza Diggs, director of federal advocacy for the National League of Cities. “It’s not just an inside-the-Beltway conversation.”

In Pataskala, Ohio, Nicholson worries that weary residents might balk at future tax increases to pay for a backlog of infrastructure projects. Worse, exasperated residents might even call for a repeal of the 1 percent tax that local officials spent years putting in place.

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In San Diego, officials drawing up plans for a local tax increase to provide long-term housing to the homeless are also worried. In San Diego County, the elimination of what is commonly called the “SALT” deduction could affect about a third of households, said Greg Cox, a member of the board of supervisors. The average middle-income resident would lose a $16,000 deduction.

“It’s a big hit,” he said. The Republican tax plan is “going to make it very hard to pass any tax increases in the future.”

The fate of the tax deduction is among the thorniest issues facing Republican lawmakers who are rushing to vote on the $1.5 trillion tax bill this year. About 44 million Americans a year take advantage of the tax break to collectively save an estimated $60 billion.

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Supporters of the deduction argue that its elimination will hurt middle-class families. Among taxpayers making more than $100,000, 81 percent claimed the SALT deduction. Without it, supporters say, taxpayers face double taxation — paying federal taxes on income already claimed by state and local taxes.

City leaders speaking out against eliminating the deduction are sometimes putting themselves at odds with their representatives in Congress.

Louisville Mayor Greg Fischer (D) visited Capitol Hill this week, including a stop by the offices of Senate Majority Leader Mitch McConnell (R-Ky.), a major proponent of the Senate bill.

“It’s a $1.3 billion problem for my city,” Fischer said of the potential elimination of SALT. “That is less than Los Angeles or New York, but that is going to hit a lot of folks.”

Supporters of the deduction specifically point to the potential effect on schools, which typically rely on local property-tax revenue for funding.

The National Education Association estimates that $370 billion for public education would be at risk over the next decade under the Senate plan, and $250 billion under the House plan, assuming local tax rates were adjusted to reflect the loss of the deduction.

“When your state legislatures decide what they need to fund public schools, public libraries, roads, the fire department, they do the math,” said NEA President Lily Eskelsen García. “They say, ‘This is the burden on taxpayers, but they’ll be able to take a reasonable tax deduction on their federal, so it’ll wash out.’ ”

With those deductions gone, she added, “the pressure on states and locals now will be to reduce that tax pressure, because the federal government shifts it back.”

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Even in securely Republican states, such as Texas, the elimination of SALT has become a concern.

Conroe, 40 miles north of Houston, has grown rapidly in recent years. When Steve Williams, the assistant city administrator, began working there in 2005, it had about 35,000 residents. Now, he said, the city has more than doubled, to 83,000 residents, creating a boom in new home construction but also putting more demands on its police departments and schools.

“Our concern is that as the individual tax liability goes up, [residents] are going to pare back on support for school bonds” and other measures to fund local services,” Williams said. “As their tax burden on the federal level increases, they’re going to seek relief at the local level.”

It also could put a damper on the city’s housing market, he said. Much of Conroe’s services are funded by a 2 percent sales tax. A significant portion of that comes from taxing construction materials, he said. But homeownership could become less attractive if the property tax deduction is eliminated or limited, hampering the city’s finances, he said.

Local governments’ fears aren’t confined to the effects of removing the state and local tax deduction. Officials in the District and other cities also worry about the House plan to repeal a form of tax-exempt financing for development called private activity bonds.

Those bonds help lure private investors to low-income housing projects and other civic endeavors by effectively allowing them to borrow at municipalities’ low interest rates.

“If it wasn’t for these private activity bonds,” Esparza Diggs said, “many [cities] wouldn’t be able to expand their airports, or meet their affordable housing needs.”

This is bad tax policy driven by ideology and the GOP’s driving desire to make their billionaire campaign donors even richer, at the expense of everyone else. Such ill-considered tax policy is going to have far-reaching unintended (???) consequences at the state and local level.

7 Responses to The real ‘trickle down’ effect of the GOP tax bill: state and local government taxes

  1. Sen. John Kavanagh

    Having gone to catholic elementary school, I can do math and I have the knuckle scars to prove it. That said, the projected $100 million budget shortfall is 1% of the budget. I would say that our revenue estimate was pretty close and we may still meet them, as we are not yet half way to the end of the budget year.

    In addition, if the Trump tax reforms pass and it looks like they will, they should generate more than enough economic growth to eliminate such a possible shortfall.

    You seem more impudent and hostile than usual. I hope everything is OK.

  2. Sen. John Kavanagh

    In case you forgot, you are posting in blogforarizona not blogfornewjersey or blogforcalifornia. I left NY decades ago and I should not be subsidizing their high taxes. Besides, I thought you liberals wanted the rich to pay their fair share. The poor are not taking this itemized deduction and the middle class will benefit from the increased standard deduction.

    • For Sure Not Tom

      Pardon us if we question the abilities of you to do proper math, or understand how taxes and economies work.

      You have us 100 million dollars in the hole, sport, you should lay low on this issue.

    • Damn, Trump troll. What happened to “America First”? You’re slipping.

      • Sen. John Kavanagh

        ???

        • “In case you forgot, you are posting in blogforarizona not blogfornewjersey or blogforcalifornia.” We are Americans first, Arizonans second. The good of the country comes first ahead of parochial interests. Something you do not understand.