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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, January 3, 2018

NY Times: Democrats In High-Tax States Plot To Blunt Impact Of New Tax Law

New York Times, Democrats in High-Tax States Plot to Blunt Impact of New Tax Law:

Democrats in high-cost, high-tax states are plotting ways to do what their states’ representatives in Congress could not: blunt the impact of the newly passed Republican tax overhaul.

Governors and legislative leaders in New York, California and other states are considering legal challenges to elements of the law that they say unfairly single out parts of the country. They are looking at ways of raising revenue that aren’t penalized by the new law. And they are considering changing their state tax codes to allow residents to take advantage of other federal tax breaks — in effect, restoring deductions that the tax law scaled back.

One proposal would replace state income taxes, which are no longer fully deductible under the new law, with payroll taxes on employers, which are deductible. Another idea would be to allow residents to replace their state income tax payments with tax-deductible charitable contributions to their state governments.

Such ideas may sound far-fetched. And until recently, they were mostly the province of tax professors and bloggers. But they are now getting serious consideration in state capitols where some lawmakers see the Republican law as a thinly veiled assault on parts of the country that typically vote for Democrats. ...

Some proposals are more complex. Kirk Stark, a law professor at the University of California, Los Angeles, has suggested that states encourage residents to donate money to their state governments, then let the governments credit those donations against their state income taxes. Such donations would qualify as charitable donations, which are still fully deductible on federal taxes.

Mr. Stark noted that such programs already existed, albeit in a much more limited form. Several states let residents count donations to private schools as state tax payments under certain circumstances, an initiative that conservatives have promoted as a step toward school vouchers.

Another idea would be for states to partly or completely replace their income taxes with payroll taxes paid by employers, similar to existing taxes for Social Security and unemployment insurance.

In theory, such a move wouldn’t change after-tax income for either companies or individuals. It would just change where the tax checks were coming from. Companies would reduce workers’ pay by the amount of the payroll tax, and would be able to deduct the payments on their federal taxes. Because they would never receive the money, workers wouldn’t be taxed on it.

“In effect, it preserves the state income tax deduction,” said Dean Baker, a liberal economist who has been pushing for the plan.

Both ideas — and others like them — would face logistical hurdles, legal challenges and, most likely, opposition from Congress and the federal government. But they are nonetheless rapidly moving from the realm of academic theory into actual policymaking.

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As every tax student knows, a label doesn't determine what something really is. If the Supreme Court can say something labeled as a penalty is really a tax, it can certainly say something labeled a charitable contribution (that carries with it a quid pro quo in the form of a tax credit) is really a tax.

Posted by: guy helvering | Jan 3, 2018 6:04:09 AM

One proposal would replace state income taxes, which are no longer fully deductible under the new law, with payroll taxes on employers

It's interesting to see progressives admit that employees bear the burden of taxes on employers. Progressives will once again pretend not to know this when proposing the next new tax on employers.

Posted by: AMTbuff | Jan 3, 2018 8:41:28 AM

I would think the IRS could best that idea in court. If not,it could beat it with a new regulation. If not,Congress could amend the statute. Dems opposing it would be voting to let rich people in just a few states get enormous tax breaks,not a winning issue if you're not representing Manhattan or San Fran.

Posted by: Eric rasmusen | Jan 3, 2018 6:40:05 PM

"Several states let residents count donations to private schools as state tax payments under certain circumstances, an initiative that conservatives have promoted as a step toward school vouchers."

But in each of these cases, the State is electing to forgo its own revenue in exchange for the donation made to another organization (school or enterprise zone, etc) usually located within its own boundary.

In this proposal, the State is providing a vehicle for its citizens to reduce their payments to the Federal government, without the Federal government's consent.
So, its different.

Posted by: Lily | Jan 3, 2018 7:57:51 PM

Gotta love this clown:

"Governor Andrew Cuomo (D-NY) joined CNN's Alyson Camerota on Thursday to discuss the 'devilish' GOP tax reform, and how the new $10,000 cap on state and local tax deductions is an attack on blue states."

Nobody is entitled to a federal deduction if the Congress passes legislation striking them out of the tax code. It's a simple as that.

I suspect Cuomo and other like-minded blue state governors don't like being targeted for economic warfare, despite the fact that they themselves target business-owners and workers in their own states and squeeze them with every regressive tax scheme imaginable.

He talks about double-taxation, all the while refunds have always been taxed, not to mention dividends. Ah, the sweet smell of whiny hypocrisy...

Posted by: MM | Jan 3, 2018 7:59:18 PM

So much for wanting to pay "their fair share."
Apparently protecting wealthier high state tax Blue-state constituents is more important.

Posted by: ruralcounsel | Jan 4, 2018 4:14:50 AM

So supporters of higher federal taxes in high tax states are complaining because they are going to pay higher federal taxes. Wow their logic is awesome.

Posted by: Thomas Carden | Jan 6, 2018 12:17:16 AM

The strange part all this concern and effort is being undertaken on behalf of the rich. Someone that is deducting more than 10k in state and local taxes is by definition someone Governor Brown called "disproportionately taking from the pie". This is not adversely impacting, and in fact likely helping, those that the democrats claim to represent. Instead the worry is being undertaken on behalf of those not paying their fair share. Strange revealed preference.

Posted by: bobby | Jan 7, 2018 10:17:32 AM