I usually find myself in agreement with Tax Policy Center experts Leonard Burman and Frank Sammartino, and I almost always learn a lot from reading their analysis. But I disagree in almost every respect with their recent post on proposals in several states to use payroll taxes and charitable credits to offset the impact of the new federal tax law’s SALT limitations.
Burman and Sammartino argue that the new $10,000 cap on the state and local tax (SALT) deduction is “one progressive element” of an otherwise regressive tax law. They say that there is “little empirical evidence” that the $10,000 cap will affect the ability of states to raise revenue for social welfare programs, and they worry about “unintended consequences” for taxpayers who benefit from the earned income tax credit (EITC) and the child tax credit. They also worry that responses from states could lead Congress to impose further limits on SALT.
I have argued here and elsewhere that states should respond to the new federal tax law by shifting away from personal income taxes on wage income and toward employer-side payroll taxes. (I provide further details on how this shift might work in a short piece published by Bloomberg Tax last month.) The core of the case for a payroll tax shift is that all workers — and not just those who itemize deductions on their federal income tax returns — should be able to pay with federally deductible dollars for public schools, public hospitals, public infrastructure, and other public services provided by state and local governments. This is especially true in a tax system that now allows an immediate deduction for most business capital expenditures and that still allows an itemized deduction for charitable contributions. The new federal tax law puts the civic sector at a disadvantage vis-à-vis the private and nonprofit sectors — for no apparent reason except that blue state voters choose to invest more in civic institutions. In my view, states such as New York can and should restructure their tax systems in order to preserve and expand their residents’ ability to fund state and local government with deductible dollars. I think Governor Cuomo deserves kudos for taking the lead on this.
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