The following article by Alan Rappeport was posted on the New York Times website November 22, 2017:
WASHINGTON — Since getting crushed by the recession a decade ago, the state of Oregon has been on an economic upswing. The jobless rate has dipped below 4 percent from a high of 12 percent in 2009, home values are up and people are flocking to the state.
Net migration accounted for roughly 88 percent of Oregon’s population growth between 2016 and 2017, according to a Portland State University study.
But state officials worry that all the economic progress is about to be undercut by the $1.5 trillion Republican tax plan sailing through Congress. While lawmakers say the plan will boost growth and strengthen the economy, Oregon officials say the bill could have the opposite effect by making the state a less affordable place to live and putting a squeeze on state and local budgets.
“What I am concerned about is that this will impede our forward momentum,” Gov. Kate Brown of Oregon said in an interview. “This tax plan will basically burst the balloon that’s happening here.”
Oregon is not alone in its concerns. State and local officials in other high-tax, largely blue states like New York, New Jersey and California are warning the tax plan will strain budgets, shake real estate markets and prompt residents to flee expensive coastal states for places with lower taxes.
Of primary concern is the Senate’s plan to repeal the state and local tax deduction, which currently allows people who itemize their tax returns to deduct state and local income, sales and property taxes paid. The tax break is claimed by people across the nation, but is more heavily utilized in higher-tax states like Oregon, California, New Jersey and New York. Eliminating the deduction has long been a goal of many Republican lawmakers, who view the tax break as a subsidy that poorer red states provide to richer blue ones that spend heavily on government services.
A report this month from Fitch, the credit rating firm, warned that repealing the state and local tax deduction would hit residents especially hard in states such as California, Connecticut, Massachusetts, New Jersey and New York. That could put pressure on state governments to reduce taxes — an uncomfortable proposition for states that are just recovering from the deep fiscal strain they faced during and after the recession.
“Most states are not in a position to lower taxes in response to the federal tax increase due to tepid revenue growth and ongoing spending pressures,” analysts at Fitch said.
In Oregon, which has one of the highest state income tax rates in the country, roughly 30 percent of taxpayers would see their federal tax bills increase by an average of $573 with a full repeal of the state and local tax deduction, according to Oregon’s legislative revenue office.
Ms. Brown, a Democrat, said repealing the deduction will put pressure on state officials to reduce taxes at a time when Oregon is already fiscally stretched in providing education, law enforcement and other services to its residents.
“We are already struggling to pay for basic services,” said Ms. Brown, who acknowledges that her team has not been able to fully analyze the scope of the legislation because it has been moving and changing so rapidly. “For Congress to move so quickly on a ginormous tax policy like this that has extremely far-reaching impact is just crazy.”
Such worries are widespread and they come at a time when state budgets are being squeezed despite a steady economic upturn nationally. Economists attribute the shortfalls to a mix of slower sales tax revenues and ill-advised tax cuts in some states combined with a hangover from the recession. The Trump administration has also called for budget cuts that would put more responsibility on the states to provide for their residents. And overhauls to welfare programs such as Medicare and Medicaid could follow if Republicans succeed in cutting taxes.
The full repeal of the deduction, often referred to by its acronym, SALT, is not a foregone conclusion. Senate Republicans want to eliminate it completely, saving about $1.3 trillion over a decade, while House Republicans have agreed to maintain a deduction for up to $10,000 in property taxes. The two plans ultimately must be aligned before legislation can be passed and sent to President Trump’s desk for signing.
The Trump administration and most Republicans in Congress make the case that the state and local deduction is an unfair subsidy for high tax states that burdens both the federal government and other states with lower taxes. They also contend that it overwhelmingly benefits wealthy taxpayers that are concentrated in a handful of states that are mostly led by Democrats.
With a Trump administration that is filled with wealthy New Yorkers, the White House is keenly aware of these concerns, and Steven Mnuchin, the Treasury secretary, has expressed openness to compromise on the issue. Noting that he has lived in both California and New York, which would be among the hardest hit by a repeal, Mr. Mnuchin has said he is sensitive to the broader impact on the nation of policies that might stunt the growth of state economies.
Many leaders in New York hope that the members of the Trump administration who hail from the state will intervene. Some have even appealed to Mr. Trump’s sense of self-interest, warning that getting rid of the deductibility of local taxes could be a big drag on the value of the president’s condominium business in Manhattan if people can no longer afford to live in them.
Thomas DiNapoli, New York State’s comptroller, said that if the state and local deduction was completely eliminated, New York would come under pressure to make property or other taxes deductible at the state level. Another possible consequence is that people will just pick up and leave the state, eroding the tax base through attrition as they seek lower tax jurisdictions.
“If you lose that deductibility, I worry about more middle class families leaving,” Mr. DiNapoli said. ”If we lose the middle class and end up as a state of both ends, with those who can most afford to stay here and those who can’t afford to move because they don’t have the resources, that’s not a very positive future.”
He added: “But people may have to pick up and move somewhere else.”
New York Democrats have estimated that nearly a third of the state’s taxpayers will see their federal tax bills rise by more than $3,000 if the state and local tax deduction is eliminated. They also have pushed back against the argument from Republicans that New York is being subsidized by the federal government, pointing out that the state sends $41 billion more in tax payments to Washington than it received in federal spending last year.
In California, the state budget is projected to top $180 billion this year, but local officials say that scrapping the state and local tax deduction could mean that some plans for large-scale projects and investments could have to be curtailed. According to an analysis by the California Budget and Policy Center, California K-12 schools could lose $4.6 billion per year without the state and local deduction because the state will struggle to raise revenue when it needs to down the road. The funding of infrastructure projects, they say, could also stall.
“It’s a significant cost shift,” said John Chiang, California’s state treasurer. “It’s going to put pressure on individuals, businesses and government in California.”
Belt tightening at the state level may also trickle down to cities and towns.
In New Jersey, state funding has been critical to assisting Atlantic City in its revival efforts after several casinos closed and its economy cratered three years ago. However, lawmakers in the state said last week that the incoming Democratic governor, Phil Murphy, would likely have to rethink the tax increase on the wealthy he has been considering if such taxes are no longer deductible on federal taxes.
As they have in other states that would be punished by the repeal of the deduction, even Republicans in New Jersey are urging the House and Senate to think twice about the ramifications of repealing the state and local tax deduction.
Mayor Don Guardian of Atlantic City, a Republican whose term concludes at the end of the year, said that repealing the deduction would primarily hurt middle class homeowners across the state who currently itemize their tax returns and benefit from writing off those taxes. He warned that such a move would deal a blow to the resort’s comeback hopes that have been buoyed by the impending opening of a new casino and the arrival of Stockton University’s new campus by the Boardwalk.
“Atlantic City has hit the bottom and is coming back up,” Mr. Guardian said, expressing regret that federal tax policies pursued by his own party could derail that progress by forcing residents to essentially be taxed twice. “Every day is a new crisis, and this is certainly not good.”
View the post here.