Blue-state officials plot response to GOP tax law

Blue-state officials plot response to GOP tax law
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Elected officials in high-tax Democratic-leaning states are looking at creative ways to prevent the new tax law from raising their residents’ bills.

The new law, which passed in December with only Republican votes, caps the state and local tax (SALT) deduction at $10,000. GOP lawmakers said they hoped that would motivate high-tax states such as New York, New Jersey and California to curb their own taxes and spending.

But politicians in blue states view the tax law as an attack on them, and are pushing back. 

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“We sort of have two choices. One choice is to step back and let this happen to us. Or the other is to get into the arena and fight like heck,” New Jersey Gov.-elect Phil Murphy (D) said at a news conference Friday. “And this is New Jersey after all.”

The tax law is just one of the ways Republicans have taken aim at Democratic-leaning cities and states in recent months.

A bill offered by Sens. Lindsey GrahamLindsey Olin GrahamHouse Judiciary chair threatens subpoena if DOJ doesn’t supply McCabe memos by Tuesday Rosenstein report gives GOP new ammo against DOJ Graham: There's a 'bureaucratic coup' taking place against Trump MORE (R-S.C.) and Bill CassidyWilliam (Bill) Morgan CassidyOvernight Health Care: Opioids package nears finish line | Measure to help drug companies draws ire | Maryland ObamaCare rates to drop Overnight Health Care: HHS diverts funds to pay for detaining migrant children | Health officials defend transfers | Lawmakers consider easing drug company costs in opioids deal Overnight Health Care: Senators target surprise medical bills | Group looks to allow Medicaid funds for substance abuse programs | FDA launches anti-vaping campaign for teens MORE (R-La.) would have shifted money from states that expanded Medicaid, often blue states, to states that didn’t. That bill has yet to receive a vote, however. 

The tax law, on the other hand, became law despite the strenuous objections of blue-state officials.

Those politicians are looking at several ways to circumvent the SALT deduction cap, each with different benefits and obstacles. 

One option is to challenge the tax law in the courts. New York Gov. Andrew Cuomo (D) has said he plans to sue over the law, and Murphy has expressed interest in a legal challenge as well.

A successful legal challenge to the law could be the best outcome for blue states, because that could lead to the elimination of the SALT deduction cap.

Cuomo did not describe the legal arguments that his lawsuit would make. One could be that state and local taxes can’t be considered taxable income under the 16th Amendment of the Constitution, or that the law violates the 14th Amendment and the equal protection clause because it discriminates against people based on their state. 

But tax experts doubt the lawsuits will be successful. They noted that Congress has broad discretion to levy an income tax, and pointed out that the alternative minimum tax has limited the SALT deduction for years. 

“The cases seem to be low-probability,” said David Kamin, a former economic adviser in the Obama administration who is now a law professor at New York University.

Another option that blue-state officials are considering is allowing taxpayers to make tax-deductible charitable contributions to state and local funds.

Kevin de León, the president pro tempore of the California Senate who is also running for the U.S. Senate, offered legislation on Thursday that would allow state residents to donate to a fund and receive a dollar-for-dollar tax credit for those contributions. Cuomo and Murphy are looking at taking similar initiatives.

“The Republican tax plan gives corporations and hedge-fund managers a trillion-dollar tax cut and expects California taxpayers to foot the bill,” de León said in a news release. “We won’t allow California residents to be the casualty of this disastrous tax scheme.”

Some states already have similar types of programs, where they can get a credit against their state taxes for donations to private education.

But tax experts suggested that the IRS might challenge charitable contribution arrangements. Questions could be raised about whether the donations are in fact charitable, which is necessary for them to be deductible on federal tax returns. 

“I think it’s a harder legal issue,” said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center.

A third option under consideration for the states is shifting toward a payroll tax system. Under that option, states would create employer-side payroll taxes, which would still be deductible on federal tax returns, and would also provide employees a credit to offset their income tax liability.

Daniel Hemel, a law professor at the University of Chicago, said that a move to a payroll tax would not be too difficult to do in states with flatter income taxes, such as Illinois and Massachusetts, though it could be a little more challenging in states with progressive income tax structures such as New York. Payroll taxes are typically flat taxes.

Hemel and a number of other tax experts also said that there are likely fewer legal issues with a shift to a payroll tax than with the other options for getting around the SALT cap.

“I think this is on pretty strong legal grounds,” Hemel said.

But Jared Walczak, a senior policy analyst at the Tax Foundation, suggested that the payroll tax combined with a tax credit could still draw concerns from the IRS.

“The IRS might well conclude that this is little more than a shell game, with the employer effectively remitting the employee’s income tax payments on his or her behalf,” Walczak said in a paper released Friday.

State and local politicians will also face pressure to lower taxes in light of the new law, particularly because of the new limit on the SALT deduction.

But Max Behlke of the National Conference of State Legislatures said it could be challenging for states and localities to cut taxes that are used to fund programs like education, since constituents wouldn’t want to see spending on schools reduced.

“Most states don’t have a lot to cut” on the spending side, Behlke said.

But Republican supporters of the tax law say it’s high time that the blue states reduce the tax burden on their residents. They say officials should focus on reducing taxes and spending, rather than looking for ways around the new system. 

“Tax reform works and hardworking New Yorkers deserve to keep more of their money. Our state has one of the highest tax burdens in the country,” Rep. Tom ReedThomas (Tom) W. ReedJordan hits campaign trail amid bid for Speaker Overnight Health Care: Kavanaugh questioned if Roe v. Wade was 'settled law' in leaked email | Senate to vote next week on opioid package | Officials seek to jail migrant children indefinitely | HHS chief, lawmakers meet over drug prices House Republicans huddle on 'tax cuts 2.0' MORE (R-N.Y.) said in a statement. “I call on the governor to follow our lead and cut taxes at the state level, rather than sling misinformation to try to deflect from his poor record as governor."

White House National Economic Council Director Gary Cohn told Bloomberg on Friday that the federal government would evaluate states’ tax maneuvers in the context of how they impact federal revenues. The cap on the SALT deduction is one of the main revenue-raising provisions in the new law.

“I understand what they’re trying to do for their cities and their states and their taxpayers,” he said. “We at the federal government still have to collect revenue.”