Democrats May Hamper Impact of Federal Tax Reform Throughout 2018

One idea that's being bandied about is letting residents in states like New York and California make tax-deductible charitable donations to state government in lieu of state income taxes.

Republican politicians seemed never to tire of talking about states’ rights while President Obama was in office. This time around, Democratic senators, house representatives, and governors look set to diminish the impact that the federal tax overhaul could have in their states.

Governors and federal politicians in California and New York are arraying their legal arguments against objectionable aspects of President Trump’s tax reform agenda. These states are seeking out ways to raise their revenue throughout 2018 to offset the cost of added social services. States like California tend to tax at higher rates in order to fund more social programs.

One idea that’s being bandied about is letting residents in states like New York and California make tax-deductible charitable donations to state government in lieu of state income taxes. Democratic governors and legislators were especially dismayed by the federal tax reform agenda’s rule that puts a cap of $10,000 on state tax deductions. Before the 2017 tax reform was rushed through the Republican-dominated House of Representatives and Senate, there wasn’t any cap on tax or local deductions at all.

Many Democrats have surmised that changing the rules of how much states can tax is meant to cripple high-tax states like New Jersey, Connecticut, and New York. State budgets might barely scrape by considering their social spending programs, infrastructure plans, and pension obligations. States like New York might also lose business because of changes to the tax code.

Democratic governor of New York, Andrew Cuomo, is allowing New Yorkers to prepay their property taxes for 2018 to allow residents to stay one step ahead of the cap on deductions. Governor Cuomo appears to have inspired other Democratic governors to do the same. Still, Democrats will have their work cut out for them in the year ahead as they think up increasingly ingenious ways of funding their states’ programs and subverting the spirit, if not the letter, of the new tax law.

Some states are becoming even more radical in their efforts to keep funding high. One such proposal involved moving towards taxing corporations at higher rates than individuals in certain states. There would, of course, be a delicate balance to strike here since too little taxes could mean being underfunded and being too onerous with taxes could result in business flight from your state.

Swapping income for payroll taxes is another proposal, but these ideas’ effectiveness is clearly yet undetermined.

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