New York: Legislation would create a state income tax credit to offset loss of state and local tax deduction

Certain high-tax states are preparing for the worst as Congress debates eliminating deductions for state and local income, sales, and property taxes from federal liability as part of its tax code overhaul. New York is one such jurisdiction. On Nov. 22, 2017, Sen. Simcha Felder, whose district covers a portion of Brooklyn, and contains about 300,000 residents, introduced legislation that would amend the state’s tax law by establishing a tax credit equal to any increase in federal tax liability, should “residents no longer being able to deduct state and local taxes from their federal income.”

The “Hold New Yorkers Harmless Tax Credit,” S. 6951 , provides “a credit for the difference in a resident's current federal tax liability and what such resident's federal tax liability would have been if it was calculated by using the IRS code on Nov. 15, 2017.” It would take effect immediately.

The legislation cites the Urban-Brookings Tax Policy Center for the fact that about 3.3 million people in New York state take advantage of the state and local tax deduction, so the loss of the so-called SALT deduction would have a “serious impact” on many. Noting that it is not yet clear how Congress will finally craft its overhaul, S 6951 nevertheless concedes that New York’s residents are “already over-taxed and over-fined,” such that when federal government raises taxes, “it's up to the State Government to step in and cover the increase.” “This Bill will protect every hardworking New Yorker from the uncertainty and potential negative consequences of Washington's tax overhaul.”

In the meantime, the federal tax writers are considering ways to “give relief” to residents of high tax states,” such as New York, California and New Jersey, reported a recent Washington Post piece.

Would residents move?

What happens at the federal level could impact other revenue collection tactics, suggested a pair of Bloomberg articles. For example, we frequently address states’ efforts to impose incremental taxes on the wealthiest citizens, sometimes referred to as a “millionaire’s tax.” On this issue, one of the Bloomberg articles featured a panelist at a New York University Institute on State and Local Taxation discussion who wondered how “states [will] respond to the loss of the state and local tax deduction…Will they be able to support a higher tax rate on high wage earners while that wage earner has the means to move to a low-tax jurisdiction?” He thought that “wealthy taxpayers may migrate to states such as Florida or Texas that don’t impose a state income tax.”

This premise that people will simply move if they think their taxes are too high, has been questioned in this and other contexts, but the threat persists, as a different Washington Post article showed. It described interviews with several people who participated in a national survey of 900 prospective home buyers that the real estate company Redfin conducted. They said they are “seriously thinking” about “shifting their home searches to locations where they will be less exposed to tax increases” if Congress eliminates the SALT deduction. 33 percent of the 900 homeowners who expect to move in the next 12 months are of that mindset, according to Redfin’s survey.

On the other hand, last year, a Forbes contributor cited a study that we, too, addressed at the time, to assert that “[m]illionaires hardly ever move from one state to another for any reason, and when they do there is little evidence that their choice is driven by taxes.”

Would a federal digital tax law mitigate states’ losses?

The other Bloomberg article covered the possible loss of the SALT deduction as viewed by a law professor at the University of Connecticut School of Law. He opined that Congress would “owe” states for eliminating the SALT deduction, and might be more likely to “expand states’ taxing authority over remote retailers… Congress is putting pressure on the states, and here is something Congress could do to reverse that.”

The United States Supreme Court could influence the situation also. It will soon be deciding whether to hear the case South Dakota v. Wayfair, Inc., in which Dec. 7, 2017 was the deadline for submission of the briefs. Last month, we commented on the accumulation of friend-of-the-court filings from various interested parties in the ‘Kill Quill” movement. Now we wait to see if the court will take the case.