3 Ways High-Tax States Are Fighting Federal Tax Reform

Closeup on businessman holding a card with text tax reform

What do you think of these states’ proposals to counteract federal tax reform?

As this year’s federal tax reform begins to come into play, high-tax states like California, New York, New Jersey and Maryland are coming up with ways to work around it, “reworking their tax codes to ease residents’ pain from new limits to federal deductions for state, local and property taxes,” as CNBC explains.

How are legislators in these states fighting against the tax reform? Three states – New Jersey, Connecticut and New York – are taking the matter to court, suing the federal government over it. That’s not all high-tax states are doing, though. Here are a few additional ways some state legislatures are proposing to counteract some of the new measures.

In California: Donate to the California Excellence Fund

In response to the $10,000 cap on property, state and local income tax (SALT) deductions, California Senate leader de Leon introduced a bill allowing the residents to pay some state taxes to the California Excellence Fund, a state nonprofit. This would let them deduct their charitable contribution on their federal tax return. The idea is that the taxpayer would pay the first $10,000 of their SALT taxes as normal, and then contribute the remaining amount to the fund as a donation, thereby making their entire SALT taxes deductible. For more information, check out this recent blog post.

In addition, Assemblymen McCarty and Ting proposed a state amendment that would create a new tax for businesses in the state. The Sacramento Bee explains, “[California] already has a state corporate tax rate of 8.84 percent. Companies with annual net income of more than $1 million in California would pay an additional surcharge of 7 percent, or half their savings from the recent federal tax cut.” As you can imagine, many state business groups are against this proposal. With the state already having a bad reputation for corporations, those against the amendment are worried it would, “Push more companies out of California or force them to shut down entirely.” We tend to agree and are currently not in support of this proposal.

In Maryland: Contribute to Public Schools + Independent State Taxes

In a similar vein to California’s approach, this state’s residents would be able to make charitable contributions to public schools. In addition, Maryland’s legislators want to keep personal exemptions on the state tax returns (which were dropped from the federal tax code) and separate the estate taxes from the federal framework. This would keep the state estate tax exemption at $5 million – significantly lower than the $11 million outlined in the federal tax reform.

In New York: Implement a Wage Credit

In addition to a proposal similar to California’s, where residents can contribute SALT taxes over $10,000 to a state charity, New York legislators have proposed shifting from employees who can no longer deduct their taxes to their employers.

CNBC explains, “Employers, facing a higher tax bill, would most likely reduce wages. But the state would give employees a wage credit, which would be deductible. So if an employee makes $75,000 a year, and the employer lowers her salary to $65,000 because it’s now paying a new payroll tax, the state would give the employee a wage credit for $10,000. The employee is back where she started (at $75,000) — but now she has her state taxes shielded from federal taxation.”

In New Jersey: Charitable Deductions for Homeowners

This state’s proposed plan would mean that municipalities would create charitable funds to pay for public services (such as schools and law enforcement). Then homeowners could contribute to these funds, making up lost property tax breaks with a charitable deduction instead.

It will be interesting to see which (if any) of these proposals end up passing, or what additional new options state legislators across the country come up with in response the federal tax reform. It’ll also be interesting to see if the US Congress enacts legislation that would potentially block these state tax proposals if they pass at the state levels. It should be an interesting year ahead!

Please let us know if you have any questions about how the current tax code affects your business – we’re happy to help!

Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects. To learn more, contact us today at www.MilesConsultingGroup.com.

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