States with higher tax rates are going to be hit hard by federal tax reform. What will they do about it?
State legislators in higher-tax states like California, New York, New Jersey, and Maryland — concerned that the new federal tax law that puts a $10,000 limit on deducting state, local, and property taxes could hurt state taxpayers — have started debating how to change their own laws to accommodate taxpayers disproportionately impacted by the rules.
Taxpayers will begin to feel just how high their states' tax rates are unless those states change their tax codes.
A cap on state tax deductions will disproportionately affect homeowners in states with high property taxes and higher income earners (putting a another spin on the argument over whether federal tax cuts help upper incomes).
Since the bill passed and was signed into law, lawmakers in these states are now trying to figure out what they can do to address a very new reality — that their high taxes were being offset with a federal break.
So far, however, my state's governor is the only one who has announced his intention to do something about it.
Maryland Gov. Larry Hogan announced on Wednesday that he would introduce legislation in January's state assembly to change Maryland’s tax code to allow taxpayers to keep the money that otherwise would have been taken by the state under the new tax plan.
While not specific about how his legislation would work, according to the Baltimore Sun , the state could potentially bring in $750 million more in revenue as a result of the federal cap on deductions for state and local income tax.
Here's how it works right now: Maryland's tax return calculation starts with the federal adjusted gross income. It then adds in other taxable income before taking the federal deductions and subtracting state and local income payments from it to reach its deductible allowance (not counting other exemptions and subtractions).
So if a worker was able to deduct $15,000, for instance, last year on his state and local taxes on a federal return (mine was less than that), this year, he can only add up to $10,000 total to his deductions. That means when you go to the line on the state form where you subtract the state and local income taxes, the real number, if over $10,000, is no longer a match to the federal form.
So what does the state do? It has to either make it possible for those two numbers to be different (not currently allowed by law), or it ends up taxing people on tax they already paid over the $10,000 limit.
Details of the plan are still to be released, and the state comptroller’s office is still working on evaluating on how exactly the new tax plan will work, but Hogan said he hopes that the state legislature will join him unanimously in ensuring that taxpayers are not burdened because of the new tax plan.
“Our goal will be to leave that money in the pockets of hard-working Marylanders,” he said at a Board of Public Works meeting. “I am confident that our partners in the General Assembly who have expressed concern over the impact of this tax reform bill will support us unanimously in protecting Marylanders who could be negatively affected. Protecting taxpayers should be a bipartisan issue.”
Just one hitch: Hogan is a Republican governor in a very Democratic state, which means it's almost impossible for him to get the legislature to go along with any suggestion he has, regardless of merit. Whatever happens to help state taxpayers, it will have to be a solution for which everyone in Annapolis can take credit.
Will you be impacted on your state taxes by the $10,000 cut-off and who benefits by the states changing the law?