High-Tax States Fight for Their Deductions

California, New York, and other high-tax states have set themselves to foil the provisions of the new tax law.  They do not like that would allow their residents federal write-offs on state taxes of only up to $10,000.  Politicians and policy makers in Sacramento, Albany, and elsewhere have shown great imagination.  Much has an tone of petulance.  In any case, their “solutions” will likely fail.

First on the list  is the suggestion that residents prepay property taxes for 2018 so that they can write-off the full amount under the old federal tax law.  This opportunity has now passed.  It constituted a one-shot matter anyway.  For many taxpayers, particularly the high rollers, it will do them little good, since alternative minimum tax will hit them anyway when they file this April.  It will help the states, however, giving them the use of the money for months longer than they would otherwise have it.  Funny how that worked out.

California has suggested that it will allow residents to substitute “charitable” giving in place of taxes.  Specifically, it would excuse residents income taxes if they give a like amount to what Sacramento calls the California Excellence Fund .  This could have lasting effect, were it to pass muster with the IRS in Washington.  But that is doubtful.  The supposed “giving” is a clear subterfuge, and the IRS is well accustomed to finding, labeling, and disallowing such maneuvers .  No doubt, the folks in Sacramento, Albany, Springfield, Trenton, and elsewhere can come up with many other such devices, but they would all likely fail in similar ways with the IRS.

Then there is the idea to substitute a payroll tax on employers for state income taxes.  That might pass muster with the IRS.  States, after all, have the right to abolish one tax and impose another.  But any state that chose this approach would drive itself down by driving jobs elsewhere.

To the politicians, it no doubt seems a winner.  In aggregate residents pay the same in tax but this way they retain their write-offs.  Single proprietors would perhaps also see it that way.  They get relief on income taxes and an expense write-off on the payroll tax.  Even then they might find the tradeoff less than equitable.  Since this “solution” would effectively take the tax burden from all resident income earners and put it entirely on employers, it is not apparent how high the it would have to get to compensate for the loss of income taxes.

The tradeoff in this proposal is even less attractive for other employers.  Corporations, for instance, would get no net income-tax tax break and still face the added payroll tax expense on which they could claw back only some from their federal taxes. Shareholders would, of course, like the income tax relief, but only those who are residents of the state in question. The rest would face more taxes in total for holding shares in firms that have operations in the state who plays this game.

All employers, from sole proprieties to giant firms, would in any case have a powerful inducement to substitute machinery, AI, for workers and save the expense entirely.  Or they could save the expense by simply leaving for another state.

Perhaps if these politicians stamp there foot, it will have some effect.  The only “safe space” for them is to reconsider their own addition to high taxes.

 

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