Gov. Andrew Cuomo has criticized the Republican tax plan advancing through Congress, which is set to come to a vote in the House of Representatives on Thursday, as “a lump of coal from Santa Trump.” New York City Mayor Bill de Blasio has blasted it, and U.S. Senate Minority Leader Charles Schumer called it “a dagger to the heart of New York.” Even several Republican members of New York’s congressional delegation have condemned the plan as being unfair to their constituents.
The bills currently under consideration in the House and the Senate differ, and neither one represents the final product, as more negotiation is needed before the tax cut package passes both houses of Congress, pointed out E.J. McMahon, research director for the Empire Center for Public Policy.
For now, there are several important provisions in the tax plans, including changes to tax brackets and the Senate’s inclusion of the repeal of the individual mandate in the Affordable Care Act as part of their bill. The Republican tax plan is also particularly relevant to New Yorkers due to provisions of the bills that would restrict – or in the Senate version, eliminate – the state and local tax deduction.
What is the state and local tax deduction?
Currently, taxpayers can deduct state and local property taxes, as well as state income and sales taxes. This deduction is heavily used in states with high property taxes such as New York, where 3.3 million people rely on the deduction, according to the governor’s office. As the broader plan includes cuts to individual and corporate tax rates, restricting or eliminating the state and local tax deduction would offset the cost of those cuts.
The bill under consideration in the House would restrict federal tax deductions claimed by New Yorkers by 71 percent, eliminating the deduction for state income taxes and allowing a deduction for property taxes up to $10,000. The Senate bill would eliminate the deduction entirely.
Even though the House and Senate bills are not the final version of the tax plan, McMahon believes the state and local tax deduction changes are here to stay.
“The starting point is, what’s in both plans? What big thing do they both agree on?” McMahon said, noting that both plans restrict the state and local tax deduction. “That particular thing is most likely to be in the final bill, and that particular thing will mostly affect the six-figure middle class of New York suburbs and New York City, and the highest income New Yorkers.”
Who supports the bill in New York?
In October, seven out of New York’s nine congressional Republicans voted against a budget resolution in the House that cleared the way for a tax bill to pass without any Democratic votes. The only two who voted for the bill were Reps. Chris Collins and Tom Reed, who have continued to support the tax plan. Rep. John Katko has also since expressed his support for the bill. Reed and Collins helped to negotiate the compromise which led to the reduction, but not the complete elimination, of the property tax deduction. They argue that the combination of lower tax rates and reducing the tax brackets from seven to four, as well as the higher standard deduction, will offset losses.
However, many Republicans in New York still believe that this compromise was not sufficient. Rep. Peter King has called the bill“bad for Long Island,” where many constituents pay over $10,000 in property taxes. Fellow Long Islander Rep. Lee Zeldin is also publicly opposing the bill, as is Staten Island Rep. Dan Donovan. Upstate, Reps. Elise Stefanik and John Faso have come out against the bill, while Rep. Claudia Tenney remains undecided.
What does this mean for New Yorkers?
Cuomo said in an open letter to President Donald Trump that even with the compromise orchestrated by Reed and Collins, the tax plan would cost New Yorkers $15 billion, with the average middle class family paying $1,715 more.
However, as McMahon noted, there is no “average” middle class family, given the diversity in incomes across the state. He gave an example of a couple in Garden City making $180,000 a year with $15,000 in property taxes. This hypothetical family would see an increase in taxes. Alternatively, he also said that a family making $65,000 to $85,000 in upstate New York would enjoy moderate tax cuts, but cautioned that the benefits of the tax plan will be primarily individual.
“Overall for the state and city, it’s a net negative,” McMahon said.
Although the House and Senate tax plans include a provision that would lower the corporate tax rate from 35 percent to 20 percent, McMahon remains skeptical that the change will be included in the final version of the bill. If the corporate tax rate is not lowered but the state and local tax deduction is partially or completely eliminated, he argued that the state will suffer, and the ripple effects throughout the economy.
“Most of the wealthiest New Yorkers, who are the cash cows for state government in particular, and also account for nearly half of the city's income tax receipts, are going to pay higher taxes with this plan,” he said. “The net effective tax price of living in New York City for the highest earners is going to rise to its highest level ever. Period. Underscore.”
If taxes become too high for these high earners, it would provide an incentive for them to leave the state – or in McMahon’s diplomatic phrasing, “change their tax domicile” – leaving a hole in New York’s economy.
This could, indirectly, have an effect on the current debate over funding the Metropolitan Transportation Authority. New York City Mayor Bill de Blasio has proposed a so-called “millionaire’s tax,” arguing that taxing high income New Yorkers could be a source of funding for the MTA. However, McMahon said that if these millionaires are already paying higher taxes under the new tax plan, they would be hit even harder, and have more incentive to leave.
“The mayor doesn’t even seem to get it,” he said. “He has to be living in an alternative universe.”
Although McMahon and several Democratic and Republican lawmakers in New York believe the tax plan would be bad for the state, there may not be an alternative. The bill may pass the House even without the support of several New Yorkers or representatives from other states with high property taxes. This could show Republican leadership that it is possible to approve the plan without revising the state and local tax deduction provision, and certain New York taxpayers may need to adjust to a new reality of higher property taxes in the long term future.
“Once you lose the state and local tax deduction, or any significant part of it,” McMahon said, “you'll never get it back.”
Correction: An earlier version of this post incorrectly said that the House bill would allow a deduction for property taxes over $10,000. The change would allow a deduction for property taxes up to $10,000. The post has also been updated to reflect that Rep. John Faso has come out in opposition to the bill.