When it comes to taxes the left is always demanding that the wealthy pay their “fair share” and denouncing any tax cut that might benefit higher incomes. In the last tax bill passed by Congress the legislation did two thing that were designed to offset each other.
First, they reduced the top rate from 39.7% on taxable income over $470,700 to 37% on taxable income over $500,000. This immediately forced the Democrats in Congress to decry this as a giveaway to wealthy people and said Republicans were just doing the bidding of their rich donors.
Second, the bill placed a cap of $10,000 on the deduction for State and Local Taxes (SALT). This means you can only deduct that amount, which includes state income taxes and property taxes, on your tax return if you itemize.
So basically high earners got a small reduction in the top rate but they also lost the deduction for the SALT which will ameliorate the savings they got from the rate reduction. But the reaction of liberal Senators and Congressmen from states like New York, California and Illinois was shock and outrage. How dare the tax code discriminate against them just because they had higher state taxes than other states.
I find this a bit disingenuous because of their constant demand that the wealthy pay more in taxes. According to the Joint Tax Committee staff the new tax bill will result in 85% of taxpayers will file using the standard deduction, which was doubled in the new tax code. So that means about 15-20% (being generous) will file their 1040 with deductions. These will be the highest earners and that means they will be paying higher taxes, something Democrats have been demanding all along.
But this is now about politics. It is no longer about fiscal policy. If those people affected by reduction in SALT live in your state or district you are going to hear from them and you are going to show them you are supportive. Hence Democrats from these states decrying the language in the bill that would cap the SALT deduction.
This has led to states trying to find ways around the federal tax code and protect their wealthy residents from paying their “fair share” of taxes. Several states have proposed some different plans but New York is the first to actually try to implement one of these schemes. In a budget deal struck with Governor Andrew Cuomo (potential Presidential candidate in 2020) tries to assist taxpayers who would be hurt from this new law by paying their “state taxes” through a state-run charitable fund. Since it would technically be a charitable deduction it would not be subject to the cap on SALT. They have created some other mechanisms for employers but it is very vague on how that would work. You can bet that the other high tax states like California and New Jersey will be paying close attention. You can also bet that the courts will take a hard look at this obvious end run around the federal tax code and there is a good change it will be struck down.
You also then have to ask is who is going to oversee this new “charity” and how much will it cost to build a bureaucracy to administer it? Will the charity be able to direct where they want the funds to be used? And then you have to ask if it is both normal and legal for the state to operate a charitable institution?
Just remember, these are the same people now complaining that also decried the corporate rate being cut from 35% to 21%. Of course when President Obama supported a cut to 22% it was good policy but now it is called a corporate giveaway. Once again they don’t know where to turn as they view tax policy as a political wedge on issues and not creating good government policy.
So the next time you hear a Nancy Pelosi or Chuck Schumer complaining about the wealthy not paying their fair share you should ask them why they are trying to shelter high income people from paying their full federal income taxes?