Republican tax plan a blow to Democratic states, officials say

[November 03, 2017]  By Laila Kearney and Karen Pierog

NEW YORK/CHICAGO (Reuters) - Democratic-leaning states are set to bankroll a big chunk of the tax cuts unveiled in a Republican tax plan on Thursday, as the plan slashes deductions used the most by residents of states that voted against Donald Trump in the 2016 elections.

The bill, introduced by the U.S. House of Representatives Committee on Ways and Means on Thursday, took aim at state and local tax deductions as one part of its plan to pay for reductions in taxes elsewhere. Overall, the plan would reduce federal revenues by roughly $1.5 trillion over 10 years.

The bill eliminates the most widely-used deduction - income tax - and caps property tax deductions, the second most-used, at $10,000. State and local deductions are used largely by high-tax states that tend to vote Democratic in presidential elections and local officials say the tax bill appeared to divide its benefits and burdens along partisan lines.

"I do think this has been developed in a way that looks at who were the prevailing forces in the presidential election and who were not," Kevin Sullivan, Connecticut’s Commissioner of Revenue Services, told Reuters.

Connecticut is one of several high-tax Democratic states where, local officials say, middle-class households will end up paying more taxes under the Republican plan.

Among those potentially hardest-hit are California and New York with state income tax rates of 13.3 percent - the nation's highest - and 8.82 percent respectively, according to a recent report by the Tax Foundation.

That group also includes New Jersey, Minnesota and Oregon - all of which have voted for Trump's Democratic rival Hillary Clinton in the 2016 election.

By contrast, out the seven states that levy no income tax, Trump only lost Washington, while winning Alaska, Florida, Nevada, South Dakota, Texas and Wyoming.

"By eliminating or rolling back state and local tax deductibility, Washington is sending a death blow to New York's middle class families and our economy," New York Governor Andrew Cuomo, a Democrat and one of the most outspoken opponents of the bill, wrote in a letter to Trump this week. "It's clear this is a hostile political act aimed at the economic heart of New York."

To be sure, some Republican legislators from high-tax states, including Representative Lee Zeldin, of New York, have opposed the bill.

The legislation would also end a tax exemption for billions of dollars of so-called private activity bonds issued by state and local governments annually to finance affordable housing, non-profit hospitals and colleges, as well as airports and port facilities - a measure that would affect Democrat and Republican states alike.

Conservative groups have defended the tax bill, saying it would simplify the tax code, reduce overall burden on the economy and spread the costs and burdens more fairly.

“The principles outlined in this federal tax reform effort will provide pro-growth tax rate reductions, while adding fairness and simplicity to the tax code,” Jonathan Williams, chief economist at the American Legislative Exchange Council, an organization of conservative state legislators, said in an email.

Rep. Richard Neal (D-MA), Senator Ron Wyden (D-WA), House Minority Leader Nancy Pelosi (D-CA) and Senate Minority Leader Chuck Schumer (D-NY) react to Republican legislation to overhaul the tax code on Capitol Hill in Washington, U.S., November 2, 2017. REUTERS/Joshua Roberts

Nick Samuels, a senior credit officer at Moody’s Investors Service, said the proposed bill would hit primarily high–income and high-tax states like California, New York and New Jersey, making it harder for them to raise revenue from income and property taxes.

Officials in the affected states say millions of residents, not just high-earners, would suffer because of lost tax breaks and less funding available for public services.

In New Jersey, 1.8 million households deduct a total of $17 billion in state income or sales taxes and 1.6 million households deduct a cumulative $14.9 billion in local property taxes from their federal taxes, according to the nonpartisan think-tank New Jersey Policy Perspective.

"This deal is still terrible for New Jersey's working families, with big tax breaks that overwhelmingly go to the wealthiest 1 percent, setting up deep cuts to programs and services that we all rely on,” said Jon Whiten, the group’s vice president.

Minnesota’s Democratic Governor Mark Dayton warned on Monday that the legislation would eliminate tax deductions totaling over $12.3 billion annually for 900,000 families in his state.

The states with the highest property tax collections per capita include New Jersey, New Hampshire, Connecticut and New York, according to the Tax Foundation.

For California, the Internal Revenue Service reported that approximately one in three residents took a state or local deduction in 2015, totaling roughly $113 billion, according to H.D. Palmer, a spokesman for the state’s finance department.

“Congress is trying to rush consideration of a tax proposal that will have profound and widespread impacts on California,” Palmer said.

National Conference of State Legislatures President and Republican South Dakota state senator Deb Peters in a statement called the legislation "an attack on the sovereignty of states."

(Reporting by Laila Kearney and Karen Pierog; Additional reporting by Sharon Bernstein in Sacramento; Editing by Daniel Bases and Tomasz Janowski)

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