Income tax grab faces blue-state rebellion

Blue states are fighting back against the new Republican-passed federal tax law, which well they should. That law, if left unchallenged, would exacerbate a long-held trend that has seen states such as Connecticut used as makers of federal revenues to redistribute to deep-red state takers.

The new law would place a $10,000 cap on the deductibility of state income and municipal property taxes. States that have high incomes and costs of living, such as California and here, in the Northeast, Connecticut, Massachusetts, New Jersey and New York, take a big hit to subsidize a giant tax cut for corporations.

It was not lost on Republican lawmakers that these states trend Democratic.

What is maddening is that states such as Connecticut are already paying more than their fair share.

Connecticut relies on federal revenue to pay for only about a quarter of government operations. Contrast that with the deep-red states of Mississippi and Louisiana, places where folks complain about the high cost of the federal government, but who rely on federal dollars to cover about 40 percent of their spending, according to the nonprofit Tax Foundation.

Looked at another way, for every $1 that Connecticut ships to Washington it gets back 85 cents, New York has a return of 96 cents, and New Jersey a paltry 72 cents. Mississippi rakes back $4.70, West Virginia $4.23 and Alabama $3.02, according to the Mises Institute

Now the Republicans, to collect more taxes from blue states, are trimming the deductions that taxpayers can take.

The Connecticut Mirror, citing IRS data, reports that more than 700,000 taxpayers in Connecticut, which has one of the largest property tax burdens in the nation, claimed about $13.6 billion in state income and property deductions on their 2014 federal returns. Department of Revenue Services Commissioner Kevin Sullivan states the total deduction claim is now closer to $16 billion.

On Friday, Connecticut Gov. Dannel P. Malloy, New Jersey Gov. Philip D. Murphy and New York Gov. Andrew M. Cuomo announced their states are jointly suing the federal government to block the new law and are seeking other state partners in that effort. All three are Democrats.

“(We) already pay far more to the federal government than we receive,” Murphy said.

The states contend the skewed approach to taxation violates the U.S. Constitution’s equal protection clause.

The governors also argue that, by restricting deductions of state and local taxes, the new law imposes double taxation. And by limiting deductions of state and local taxes that are used to pay for core services, the federal government is effectively dictating how states should raise revenue and spend, in violation of the principles of federalism, claim the governors.

It is a heavy lift, legally, but an appropriate way for states to push back against unfair, and potentially unconstitutional, treatment.

More promising are discussions among blue states to change the way they collect taxes, replacing the income tax with a payroll tax paid by employers. Companies would reduce workers’ pay by the amount of their state tax liability. Companies are not subject to the new federal tax code cap on deductions, and so would not lose any money.

Taxpayers, meanwhile, would effectively be paying the same to their states but see their federal tax obligations, along with their taxable incomes, lowered.

Some leaders in California have suggested a more radical option — collecting state and local income tax payments through a mechanism that would make them charitable deductions under the federal tax code.

While not ready to endorse these suggestions, we welcome their intent, to send a message, as Malloy said Friday, “Not at this time. You can’t do this. It is fundamentally unfair and illegal.”

If these states successfully implement such tax changes, revenues produced by the new federal tax law would drop dramatically, forcing Congress to reconsider and enact a fairer tax policy.

Editor's note: The editorial was updated to correct the source of some of the cited data.

 

The editorial board is composed of the publisher and four journalists of varied editing and reporting backgrounds. The board's discussions and information gained from its meetings with political, civic, and business leaders drive the institutional voice of The Day, as expressed in its editorials. The editorial department operates separately from the newsroom.

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