Worried about the Republican tax overhaul’s potentially negative effects on local finances, Democrats in high-tax states such as New York and California are looking for ways around the new $10,000 cap on state and local tax deductions. Ben Casselman of The New York Times reviewed some of the options state-level politicians are considering:
- Replace state income taxes with payroll taxes on employers, who would reduce worker pay by the same amount while gaining a big write-off
- Replace state income taxes with charitable deductions to state governments, which are deductible. The donations would count against state taxes owed
- Challenge the constitutionality of the new limits on state and local tax deductions.
These ideas would have seemed far-fetched just a few months ago, Casselman notes, but political leaders in high-tax states feel like they have been targeted and are worried about the long-term consequences of the new rules. New York Gov. Andrew Cuomo said last week, “They want to target us for certain provisions? Well, let’s see if we can redesign our tax code to get out of the federal trap that they set.”
Whatever steps they end up taking, there’s no doubt that state and local governments are worried that the new federal tax rules will create increased pressure to reduce taxes, which in turn will force a reduction in public spending on education, health care and infrastructure. Of course, this is exactly the outcome many Republicans from low-tax states may be looking for. But they may not get quite what they want. One alternative some states could turn as they seek new sources of revenue: legalizing marijuana sales in order to apply new taxes.