Many irked by Trump’s plan to end state/local deduction on federal tax
Updated 5:25 pm, Tuesday, October 3, 2017
WASHINGTON — At a rollout last week in Indianapolis, President Donald Trump called his tax reform package “a once-in-a-generation opportunity,” and said, “I’ve been waiting for this a long time.’’
But if Connecticut has anything to say about it, Trump will be in for a much longer wait.
The state might be divided on certain elements of the proposal, such as cutting the top rate to 35 percent, the corporate rate to 20 percent or “pass-throughs’’ to 25 percent. But business and political leaders across the spectrum are united in opposition to one major element: eliminating the deduction for payments of state and local taxes.
“It’s a bad deal for Connecticut,’’ said Jim Campbell, of Westport, a Trump supporter who is former chairman of the Greenwich Republican Town Committee. “I think it would drive people out of the state.’’
Jayme Stevenson, Republican First Selectman of Darien, said she endorses the principles of lower taxes and relief for small business.
Nevertheless, “at this moment, because my local residents are under such tremendous tax pressure and we have a fiscal crisis, I would not like to see elimination of this deduction,’’ she said.
Rep. Jim Himes, a Democrat, said rolling back the state-local tax deduction would “have a profoundly negative effect on states like Connecticut.’’
Trump’s advisers defend the rollback as an essential ingredient in a larger recipe for tax simplification and reducing taxes on the middle class.
“The one thing I would beg you all to do is, don’t look at any one piece,’’ said Gary Cohn, Trump’s top economic adviser, suggesting that 75 percent of taxpayers don’t itemize and therefore under current law do not get to deduct state and local taxes. “Look at the plan in its entirety.’’
But arguably the math is different in Connecticut, a state that ranks No. 1 in some surveys of highest median income.
difference for some
The state and local tax deduction covers not only state income taxes but property taxes and sales taxes. All three are in play in Connecticut, and with property values already high and rising fast, a mortgage of $500,000 to $1 million is not uncommon.
“The people making $10 million-plus will be fine no matter what, but the economic engine of Connecticut is the professional class, the corporate guys who take in $250,000 to $1 million,’’ said Campbell. “That’s where the bulk of federal income tax comes from. Those people are very fortunate, but they’re not ‘wealthy.’ ’’
Of course, if homeowner-taxpayers in that income category face hardship in losing the state-local deduction, the difficulty is magnified for those making less.
According to data by the non-partisan Tax Foundation, taxpayers of Litchfield and New Haven Counties claim a state-local deduction averaging just above $5,000. But in Fairfield County, the average return includes a deduction of $14,260 — the fifth highest in the nation.
Getting rid of the state-local deduction would hurt efforts to get businesses to relocate in Connecticut, and to attract top-flight job applicants, said Joe McGee, vice president for public policy and programs at the Business Council of Fairfield County.
“It would be a huge problem,’’ said McGee, who said he is a Republican.
Connecticut historically sends more in taxes to Washington than it receives back in federal aid. An Associated Press survey earlier this year found that Connecticut gets back 83 cents on each dollar it sends to the federal treasury, making it the nation’s third biggest loser, behind New Jersey and Wyoming.
“So there’s a fairness argument here,’’ said McGee, adding the loss of the state-local tax deduction would exacerbate the imbalance.
The Trump proposal, engineered along with Republican leaders on Capitol Hill, leaves a lot of blanks to be filled in by Congress. But even so, it has fallen down along lines common to tax debates dating back decades.
Republicans, normally deficit hawks when a Democrat is in the White House, argue the package will spur investment and job growth that, they claim, was sluggish during eight years of the Obama presidency.
Democrats, less concerned about deficit spending when Obama rolled out his stimulus package in 2009, say the Trump proposal would explode the deficit by $2 trillion over a decade.
And, they say, it gives tax breaks to millionaires and billionaires who use the money not for jobs or raises but rather to boost CEO bonuses, dividends and stock buybacks.
The effect on business
“I’d have trouble looking my four children in the eyes and telling them I want to add trillions to the debt to cut taxes of the one-percent when there’s little or no benefit for working middle-class families,’’ said Sen. Richard Blumenthal, who has vowed to fight it along with the rest of the state’s Democratic congressional delegation.
But in a state that has seen corporate defections including GE from Fairfield to Cambridge, Mass., and Aetna from Hartford to midtown Manhattan, isn’t reduction of the corporate tax rate from 35 percent to 20 percent helpful for Connecticut?
Maybe. … but maybe not. For one thing, it is nationwide, so it would give Connecticut no particular advantage. And secondly, although the state is in the midst of a budget crisis, its corporate tax rate is “in the middle of the pack’’ of all states in the U.S., McGee said.
GE and Aetna made their moves for many reasons, including proximity to digitally adroit millennials who want to be in the New York City and Boston areas, but taxes were not high on the list.
Nevertheless, taxes as they relate to GE “were used to weaponize the argument that Connecticut is in trouble,’’ McGee said.
The “pass-through’’ modification is aimed at mom-and-pop small businesses, but it also benefits hedge funders, private equity people, lawyers and other well-to-do taxpayers by pegging business income reported on personal returns at 25 percent. The Trump measure also would end the estate tax, which kicks in at $5.4 million for about 110 estates in Connecticut.
All this would appear to be good news for Connecticut’s wealthiest residents.
But Blumenthal, himself a Greenwich resident, said the well-off in Connecticut don’t mind paying higher taxes if the money is put to good use.
“People are willing to pay more and sacrifice for the good of country as long as they feel it is used effectively,’’ Blumenthal said.