If Democrats wanted to press their case that Republicans' tax law was a massive giveaway to the wealthy, Connecticut would be a good place to start. In a state that's already home to some of the country's richest people, the law cut taxes for the state's richest 1 percent of residents by an average of $71,000 — close to 30 times the cut given to the average state resident.
But Connecticut Democrats' plan to push back on the law could, according to several nonpartisan experts, shower that same group of rich people with even more tax relief.
“It's struck me as very ironic that all these liberals are scrambling to come up with tax changes that benefit high-income people,” said Leonard E. Burman, a fellow at the nonpartisan Tax Policy Center who served in the Treasury Department under President Bill Clinton.
The dynamic isn't unique to Connecticut, as Democrats in at least six other states work on similar plans to limit the law's effects, including two that have already been enacted.
Generally, the plans are aimed at the GOP law's limits on how much of their state and local tax payments people can deduct from their federal tax bills. Before the law, certain state and local payments were fully deductible, but the GOP law capped that deduction at $10,000.
The change disproportionately affects states run by Democrats, where residents — because of both higher state taxes and high land values that push up property taxes — tend to pay more to their local and state governments. States are exploring workarounds that would change state tax payments to make them deductible on the federal level. New York and New Jersey enacted measures designed to let state residents get around the new cap earlier this month, and legislators in Maryland, California, Illinois and Rhode Island are exploring similar proposals.
Democratic lawmakers have said the workarounds to the new cap are vital to their states' economic health, arguing they are needed to protect middle-class residents from massive and sudden tax hikes. They have noted that, in 2017, millions of their state residents took the state and local tax deduction. (Some of these states are also suing the federal government over the law, arguing they were unconstitutionally targeted for living in states that tend to vote Democratic.)
But the tax provision (known as the “SALT deduction”) is more often used by wealthier people, who, by virtue of owning more and more expensive property and having higher incomes, tend to pay the most in state taxes. And as they work to undo the cap, the Democrats are pursuing plans that would do more for the wealthy than anyone else.
“Residents of Connecticut already got a huge tax cut. This workaround would further expand this tax cut, mostly for the very rich,” said Marc Goldwein, senior vice president of the Committee for a Responsible Federal Budget, a nonpartisan think tank.
Restoring the local property tax deduction in full would give additional cuts to 93 percent of Connecticut residents earning more than $1 million, according to data by the Institute on Taxation and Economic Policy, a left-leaning think tank. Virtually nobody earning less than $50,000 would get a tax cut.
Fully repealing the cap would give the richest 1 percent of Connecticut residents an additional $100,110 on average, in addition to the $71,000 benefit from the GOP law. The benefit for middle-class families barely budges up with the change, in part because many middle class families will now take the “standard deduction” that doubled under the GOP tax law.
Meanwhile, the top 1 percent in New York get an average $24,000 boost from the GOP tax law — but that number balloons to $81,900 if the cap on the deduction is repealed, according to estimates by the Tax Policy Center, a nonpartisan think tank. The average benefit from the GOP tax law for the middle 20 percent is $720. That number increases to $760 if the cap is repealed, TPC said.
“Repealing the SALT cap would really offer benefits almost exclusively to the rich,” Goldwein said.
The plans in New York, New Jersey and Connecticut will likely have a smaller impact than these estimates say, in part because not every taxpayer will use the new workaround options, according to Goldwein. But the distributional impact of the workarounds — how much they help the rich compared to how much it helps the poor — are expected to be broadly similar, he said. (There's also a question of whether the Internal Revenue Service will give approval to these workaround schemes. Some former IRS officials have said they may not be permitted under federal law.)
Defenders of the change say that the changes are necessary to prevent rich residents from fleeing the state to lower tax jurisdictions. “This analysis ignores the fact that if we don't have workarounds, we'll lose these individuals in these states. People will leave,” said Joseph Bankman, a Stanford Law professor who has urged states to pursue SALT workarounds. “You can't have a progressive tax system if your wealthy people are all gone.”
Connecticut Democrats also say the plan will protect residents from a tax hike. About 8 percent of residents of Connecticut get a tax hike from the GOP law, compared with 6.3 percent nationally, according to TPC. About 65 percent of Connecticut residents also get a tax cut, which is slightly higher than the national average, and the size of their benefit is also bigger than the national average.
“The simple truth is that the cap on SALT deductions has a disproportionate negative impact our state and harms many of our residents. While it is hard to predict with certainty, we expect that the universe of taxpayers harmed by the cap will be able to find equivalent relief to what they had under the old system under this new proposed system,” said Chris McClure, a spokesman for Connecticut Gov. Dannel P. Malloy (D), in a statement. “The system we have proposed could save individuals substantially amounts on their federal taxes while simultaneously increasing funding to our local schools or libraries — truly a win-win.”
Some Democratic-led states are also moving forward with plans that would offset the tax benefits for the rich, with New Jersey Gov. Phil Murphy (D) acting swiftly to enact a millionaire's tax, according to Meg Wiehe, deputy director of ITEP, who noted Murphy has acknowledged the workaround may help the rich. Cuomo has rebuffed similar efforts proposed by Bill DeBlasio, mayor of New York City.
Last month, New York approved a new “charitable fund,” giving taxpayers a sizable credit for their “donations” to the state, as well as a new voluntary payroll tax, which remains fully deductible, for employers use. New Jersey is also giving residents the ability to donate to a local charity in exchange for a credit off their local property taxes. Because the donation will remain deductible under federal law, the measure will reduce residents' federal tax burdens.
Connecticut lawmakers are considering a similar idea to set up local charitable funds to help residents get around the deduction limitation. "[The GOP tax law] is nothing more than a massive giveaway for the very wealthy while the middle class pick up the tab,” Malloy said in a statement. “The actions we are proposing aim to protect Connecticut residents and businesses, who are specifically targeted by this law.”