A year ago this week was the filing deadline for the first individual income tax returns affected by the biggest federal tax code overhaul in 30 years—the Tax Cuts and Jobs Act (TCJA), which took effect in 2018.
With this year’s tax return filing date postponed to mid-July in response to the coronavirus pandemic, Governor Cuomo has revived his old complaints about the TCJA’s $10,000 cap on itemized state and local tax (SALT) deductions. But under the circumstances—a crashing economy and exploding federal deficits—his case for restoring SALT is even weaker than it was before the crisis. Indeed, it verges on preposterous.
This is an installment in a special series of #NYCoronavirus chronicles by Empire Center analysts, focused on New York’s state and local policy response to the Coronavirus pandemic.
Cuomo in the past has described the TCJA’s impact on New York in apocalyptic terms, denouncing it in his 2018 State of the State address “an all-out direct attack on New York’s economic future” that would effectively raise state and local taxes on middle-class families by 25 percent. Also during 2018, he repeatedly claimed that residents of downstate suburbs would face an average tax hike of $6,400 under the new law.
As New Yorkers learned by Tax Day last year, Cuomo had vastly misrepresented data and exaggerated the negative impact. In fact, TCJA resulted in lower federal taxes for the vast majority of New Yorkers, including middle-class families who had previously claimed itemized SALT deductions. The negative impact of the SALT cap was concentrated among New York’s highest earners, especially New York City income millionaires subject to a combined state and local top tax rate of 12.7 percent, second highest in the nation after California’s 13.3 percent.
Yet in his daily briefings on the public health crisis, Cuomo has revived SALT on his wish list of bailout goals. As he put it on Easter Sunday:
A simple, easy way to help New York is right the wrong that the federal government did when it passed the SALT tax, state and local tax deductibility. That was just a political maneuver in the first place. You’re trying to help places that are suffering from the virus. Repeal the SALT tax [deduction cap]. It should have never been done, as I said, in the first place.
But lifting the SALT cap would not actually help most New Yorkers who have lost their jobs or have seen their incomes dwindle due to the pandemic shutdown. Even with the SALT deduction restored, all but higher-income families living in high-priced homes would still find it more advantageous to skip itemizing and claim the standard deduction, which was nearly doubled under the new law.
The primary beneficiaries of lifting the cap would fall within the highest-earning 1 percent of New Yorkers, most of whom are subject to the state’s already elevated millionaire tax rate. For Cuomo, the main benefit of restoring SALT would be to soften the blow of further state tax increases on income millionaires—assuming that’s what he really has in the back of his mind.
As for “simple and easy,” according to the Tax Policy Center, restoring the pre-2018 SALT deduction would lower federal revenues by $74 billion in 2021 and $420 billion over the next six years—at a time when trillions of dollars in pandemic relief stimulus spending will lead to a federal government debt larger than the entire U.S. economy for the first time since World War II.
From a New York standpoint, the governor’s sheer self-interest in the SALT issue is understandable. Even before the pandemic raised the threat of higher state taxes to come, the capped SALT deduction gave high earners a significantly greater incentive to either move out of the state or take other steps to reduce the income exposed to New York taxes. Cuomo, at least, takes this risk seriously. As he put it last year: “Tax the rich. Tax the rich. Tax the rich. We did that. God forbid the rich leave.”
But many of Cuomo’s fellow Democrats in both houses of the Legislature continue to believe that income millionaires are impervious to state tax burdens—that they will shrug it off and pay. And the pandemic is unlikely to change their minds or their attitudes on that scores. For example, the latest round of Senate majority bill introductions includes a proposal from Sen. Rachel May of Syracuse to raise the top rate on multi-million dollar earners from 8.82 percent to 10.3 percent, similar to a proposal repeatedly endorsed in the past by Assembly Speaker Carl Heastie.
The Legislature’s strong inclination to respond to the coming post-pandemic deficits with even higher taxes on high earners is a threat to the state’s precariously top-heavy tax base, and thus a big problem for Cuomo. But he shouldn’t expect much sympathy from most members in either house of Congress.
In fact, Cuomo’s only realistic hope for restoring a full or nearly full SALT deduction is the looming possibility (if not likelihood) that Congress will feel compelled to raise federal income taxes as early as next year, with the biggest rate hike targeted at the highest bracket. Economic impacts aside, that would be at best a fiscal trade-off for the Empire State, since higher federal taxes on “the wealthy,” however defined, invariably fall disproportionately on the most heavily taxed New Yorkers.
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