Friday, December 29, 2017

New York Taxes

Should five percent appear to small
Be thankful I don't take it all
--The Beatles

Since the passage of the tax cut bill, New York's Governor Andrew Cuomo has been complaining that the new law is unfair. For example, the new law caps federal deductions for state and local taxes to $10,000. Because NY is a high tax state, many high income residents will no longer be able to deduct the full amount of their state income taxes paid.

There is nothing unfair about this. After the 16th Amendment was added to the Constitution in 1913, both states and the feds can impose taxes on income. There is nothing that says that Congress can't impose a limit on deducting state income taxes paid from the federal tax bill. Congress is not forcing New York or other states to do anything. Moreover, the deduction cap is imposed equally across the 50 states.

What the new law does do is make high taxation states more apparent to its residents. Previously, state officials knew that the unlimited federal deduction of state taxes paid would soften the blow that residents would feel if state taxes were increased.

This is less likely to happen now. Higher income residents in particular will immediately feel the sting of high state taxes. They will be more likely to vote with their wallets (e.g., spend less on consumption or by move out of state) and/or at the ballot box to toss out high tax regimes.

This is why Cuomo is now reluctantly considering 'tax restructuring' within his state. He needs to cut taxes if he wants to remain in power.

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