In December 2017, the U.S. Congress enacted a new federal tax bill that placed a $10,000 cap on SALT (State And Local Tax) deductions. At the time, I stated that this tax change was grossly unfair to New York, particularly Long Island. New York already sends $48 billion more to Washington than it gets back in services. Long Island is responsible for half of that amount, alone. The cap on SALT will increase our overpayment to Washington by another $10 to $15 billion. In short, most Long Islanders are getting screwed on income taxes by Washington, which will become even more evident on April 15 in 2019.
New Yorkers across the political spectrum were critical of the new law. However, some in Albany attempted to convince taxpayers that New York State could somehow negate the impact of the new federal tax law. We would file a lawsuit, or we would replace the income tax with a payroll tax, or we would establish charitable funds for which contributions could be a credit against real property taxes. It was so simple.
Reality has been much more complex. To date, there has been no lawsuit, which would have had a slim chance of success. The State Legislature did enact a limited version of a voluntary payroll tax, which is unlikely to help most New Yorkers. The legislature also enacted authority for the establishment of charitable funds by state and local government, which would be a credit against the state income or local property taxes. The complications of administering such as Rube Goldberg contraption would be a nightmare for school districts and local governments. It was easy to adopt because it was voluntary and didn’t commit anyone to do anything. We could claim that we tried to reduce your federal tax burden.
Not so fast. Last week, the IRS issued guidance that it would be promulgating new regulations about these charitable funds that would be “informed by substance over form” principles. English translation: “We are going to call payments for government services taxes, even if a state calls them a charitable contribution.” To paraphrase Romeo and Juliet, “A tax by any other name is still a tax.”
In January, I predicted that state efforts at repealing the impacts of the federal tax law would largely be futile. That prediction appears to be coming true.
The remedy for this unfair cap on SALT deductions will not be a lawsuit or state legislation. Rather, it is the ballot box. If the elected officials hit you in the pocketbook, you vote them out of office. That is what happened to legislators on the state level who voted for the MTA Payroll Tax in 2010. That’s what should happen in 2018 and 2020 with the federal tax bill.
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