ALBANY, N.Y. — The new tax law’s repeal of the state and local deduction may pose a fiscal threat to high-tax states and their affluent taxpayers. But it’s also a political gift to Democratic officials in those states seeking to raise their national profiles by challenging President Donald Trump and circumventing the law.
For Democratic leaders in New York, California and New Jersey, finding state-level workarounds to the new tax code could deliver on a pocketbook issue for a key constituency: voters in high-cost suburbs from Orange County, Calif. to Westchester who are set to lose out most from the SALT repeal.
Take New York governor Andrew Cuomo: He’s called the SALT repeal tantamount to “economic civil war” as he lays the groundwork for a potential Democratic primary bid in 2020. Like his counterparts in California and New Jersey, he’s considering mechanisms for taxpayers to fund state and local government with charitable contributions that are then credited against their tax liability; he’s also looking at a proposal to shift the tax burden from income taxes to payroll taxes.
“In a funny way, Cuomo’s been handed a political gift here,” argues Larry Levy, executive dean of the National Center for Suburban Studies at Hofstra University on Long Island, adding that “putting the state on war footing, invoking the language of conflict, is a brilliant political strategy.”
If Cuomo changes state law “on behalf of suburban swing voters who have been hurt hardest by federal tax reform, then he is in a position to strengthen his appeal in any run for higher office,” Levy says.
The potential workarounds in each state could face challenges from the IRS or congressional Republicans banking on the revenue the SALT repeal was designed to raise.
But in New York, the fight looks worth it to Democrats. Geoff Berman, executive director of the New York Democratic State Committee, issued a statement saying Republicans who tried to stop the work-arounds would “defend the indefensible.”
Of the workaround ideas under consideration across the nation, the donation-and-credit approach has the most traction, with proposals already on the table in New Jersey and California. There, Senate President Kevin de León wants to create a “California Excellence Fund,” available for state programs, for which donations are offset by a dollar-for-dollar state tax credit.
“California is already a huge donor state, meaning we send far more money to Washington than we get in return. So we don’t plan on bankrolling this trillion-dollar tax giveaway as well,” he told POLITICO.
His measure is sure to attract attention as he moves forward with a primary challenge to U.S. Sen. Dianne Feinstein. It would require only a majority vote in each chamber of the California legislature, attainable without Republican support in the heavily Democratic state, but could jam state lawmakers as well as members of Congress.
Just two of California’s 14 House Republicans voted against the tax bill: Reps. Darrell Issa and Dana Rohrabacher. The remaining dozen have come under attack from Democrats in a state where the tax overhaul polled abysmally — and where several vulnerable Republicans face competitive re-election contests this year. Democrats are focusing their efforts in California on seven Republican-held districts that Hillary Clinton carried in 2016, including in suburbs in Orange County and the Los Angeles area that Levy was talking about.
One of California’s embattled Republicans, Rep. Ed Royce, announced Monday that he will not seek re-election. Royce, chairman of the House Foreign Affairs Committee, had come under intense criticism for his tax vote, among other issues.
In New York, five of the nine Republicans in the House delegation voted against the bill and in New Jersey it was four out of five. Democratic Rep. Josh Gottheimer outlined a plan Jan. 5 to give municipalities the ability to create new funds that would permit homeowners to pay their property taxes by making a charitable contribution.
Residents would receive a credit for the amount paid to offset their bill, and then would be able to take a charitable deduction when they file their federal tax return.
Gov.-elect Phil Murphy, who is set to take office next week, offered his support; it could be used to salvage one of the Democrat's biggest campaign proposals — a millionaires tax worth some $600 million a year.
National Republicans are pushing back. Gary Cohn, chair of the National Economic Council, told Bloomberg that he understands the work-around measures, but, “we at the federal government still have to collect revenue.”
Rep. John Faso (R-N.Y.) said that Cuomo’s energy was misdirected. “The solution is to lower the cost of government in New York and make our state a place where businesses can create jobs so our people don’t have to flee,” he said.
And the legality of the proposals, despite what advocates say, remains untested. A group of a dozen tax law professors and other experts included both principles in a paper of workaround options circulated last month —titled “The games they will play” — but The Tax Foundation argued last week that because a taxpayer is getting a one-for-one benefit for their donation, it can’t be considered deductible.
Shifting to payroll taxes is more complicated than the donation idea, business leaders say. Critics note it would involve reducing wages for some workers, and has benefits that vary by region. It would be a huge hassle with little benefit for a manufacturing firm in Utica, say, but a boon to a white-shoe law firm in Manhattan — and is tripped up by union contracts and the state’s large non-profit sector.
But Cuomo is looking at it anyway, an administration official told POLITICO, with the hope of unveiling a legislative proposal next week when the governor proposes his budget for the coming fiscal year. It may also include new funds for taxpayers to directly donate to non-profit entities — like hospitals, or universities — that are supported by state funding. There could be authorization for local governments, like New Jersey is doing, or perhaps a fund similar to California, the official said.
The administration official added that it would be a bad look for the IRS to “tie themselves into knots” to crack down.
Some in the business community are supportive. Kathy Wylde, head of the Partnership for New York City, a business group, said she was happy that the governor’s team is “brainstorming” ways to soften the loss of deductibility, which is exactly what her members are doing. “It’s a competitiveness factor that the governor is right to be worried about,” she said, saying there are national implications. “The erosion of those urban centers hurts the entire country.
Plus, state Democratic leaders see little political alternative.
“You can’t do nothing,” the administration official notes, “because if you do nothing you’re really not standing up for the people that you represent when Washington basically attacked New York.”