Politics not only makes strange bedfellows, it also forces politicians to contort themselves into unnatural positions. Witness Govs. Phil Murphy of New Jersey, Andrew Cuomo of New York and nine other blue-state leaders doing their best imitations of a Bavarian pretzel as they try to make people believe that the federal tax-reform plan is an attack on the poor.
The governors of 11 blue states are so exercised by the alleged unfairness in the new federal tax policy that they are wasting taxpayer money filing lawsuits to overturn the tax reform that is fueling the nation’s incredible economic growth this year.
Their evidence-defying arguments have become attack points for Democratic candidates in this year’s congressional elections. Their arguments are mostly deceitful and 100 percent self-serving.
The Democrats’ key gripe is that the federal tax system will no longer subsidize high-tax states by allowing a generous donation for excessively high state and local taxes (SALT). The new federal cap of $10,000 on SALT in New Jersey, where the average property-tax bill now exceeds $8,500, is problematic for Democrats because it makes it harder for them to raise taxes. And that’s all that Murphy, Cuomo and other blue-state officials really care about.
By their long-standing philosophical measuring sticks, Democrats should be happy with the 2017 tax reform because it generally helps those of modest means at the expense of the wealthy — which reflects the liberal stance of making the rich pay more taxes.
The cap on the SALT deduction has absolutely no negative impact whatsoever on the 60 percent of state residents who don’t itemize their federal income-tax returns and therefore never take the SALT deduction.
Who are these 60 percenters? Most of them are young people or seniors living in apartments and working-class people who rent homes. Many of the unaffected are also homeowners living in cities and towns whose property taxes are heavily subsidized by state government, like Paterson, Newark and Asbury Park — where property taxes are far below the state tax average.
Normally a 60 percent share of something is pretty good. If a politician wins election with 60 percent of the vote, the media calls it a landslide. This time the liberals have a different measuring stick — and here is where the political contortions come into play. Suddenly the tax-happy Democrats are worried about the 40 percent; in New Jersey that means the over-taxed suburban middle class and the heretofore evil “1 percenters,” neither of which has ever been the Democrats’ key constituency.
The suburban middle class is overtaxed precisely because of Democratic policies, including the distorted state education-aid formula that drastically underfunds suburban school districts like Parsippany, Wayne and Millburn — and heaps millions on urban districts.
Despite what the Democrats want you to think, about half of the 40 percent of the state residents who do itemize their federal taxes will not suffer. That’s because the 2017 tax reform nearly doubles the personal tax exemption to $12,000 for a single person and $24,000 for a married couple. For example: A couple paying $14,000 in property taxes can now deduct only $10,000 of that tax — losing a $4,000 deduction — and that’s all the Democrats want to focus on. But, that couple will be able to lower their taxable income by $24,000 next year — which is an increase of $11,300 over the old tax policy.
So, any tax deduction lost by the new SALT rules is mitigated by the much higher personal exemption. The higher exemption applies to renters as well, lowering their taxable income appreciably. Not surprisingly, the tax-exemption increase is not in the Democrats’ talking points.
Now let’s factor in the reduction in tax rates overall. A married couple — the Smiths — earning $160,000, who own a home, not only can decrease their taxable income by $24,000, but they will also pay 3 percent less on their taxable income because of the new lower tax brackets. After deductions, the Smiths taxable income may fall to $110,000; their savings next year will be $3,300 higher than what they paid this year.
Another positive to come out of the federal tax reform is that it forced state lawmakers to increase the SALT deduction from $10,000 to $15,000 on state income taxes. But that increase is still smaller than the increase in the federal personal exemption.
Yes, there will be some blue-state casualties of tax reform, but not a lot. Wealthy people paying high property taxes will be pinched by the deduction limits, but the SALT deduction for the wealthy was always and will continue to be offset by the federal Alternative Minimum Tax, which guarantees they pay their “fair share.”
People of modest means who bought houses decades ago in what is now a high-tax community could pay more federal tax. But the federal government didn’t create New Jersey’s property-tax crisis; our home-grown officials did.
It was easier for blue-state politicians to keep raising state taxes when generous federal write-offs took some of the sting out of the assault on taxpayers. Now it will be harder to increase taxes, as evidenced by the recent report by the credit rating agency Moody’s which earlier this month issued a “credit negative” for New Jersey, saying what Gov. Murphy and the Democrats fear — that the federal cap could reduce the amount of money available for local and state governments. But that’s only a negative to politicians addicted to spending, not to middle-class taxpayers.