Can States Fix the G.O.P. Tax Law?

https://www.nytimes.com/2018/01/03/opinion/states-fix-gop-tax.html

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Some conservatives have been almost gleeful that the Republican tax overhaul will hurt people who live in high-cost states like California, New Jersey and New York. An economist who has advised President Trump called it “death to Democrats.”

But their celebrations may have been premature. In their rush to enact tax cuts before the end of 2017, Mr. Trump and Republican leaders in Congress created a legislative monster riddled with flaws and loopholes that even they don’t fully understand. They have offered up a bonanza to tax lawyers and accountants looking for provisions that can be exploited to lower taxes for clients.

Add to that list state officials like Gov. Andrew Cuomo of New York and Kevin de León, president pro tem of the California Senate, who say they are working to negate the damage from a part of the tax law that limits the deduction for state and local taxes to $10,000 a year. To put that number into context, the average deduction in California, New Jersey and New York was more than $17,000 in 2015, according to the Government Finance Officers Association. More than a third of taxpayers in those states claimed the deduction.

There are three approaches state officials could use to undercut the tax law. First, they could encourage families to donate money to the state government by offering them a credit for those gifts against state income taxes. The idea would be to turn state taxes into charitable donations that are deductible against the federal income tax. This might sound like a gimmick that the Internal Revenue Service could easily shut down. But David Kamin, a law professor at New York University, says there is precedent supporting such a policy. For example, some states offer tax credits to people who donate money to private schools, and these donations also qualify for the federal charity deduction.

Under the second approach, which is advocated by the economist Dean Baker, state governments would replace their income taxes with payroll taxes paid by employers. Those kinds of taxes — like the one for unemployment insurance coverage — are deductible for businesses under the Republican tax law. That switch would mean that employers could pay their workers less, but take-home pay would stay the same because employees wouldn’t be on the hook for paying state income taxes.

But other experts warn that switching to a payroll tax would be complicated and could have unintended consequences if states don’t put in place other safeguards. For example, it might not be possible for employers to reduce the wages of workers who are covered by union contracts or who earn the minimum wage. A switch to a payroll tax might also tempt some businesses to move to nearby states that do not have such a tax.

The third approach is for states to file a lawsuit challenging the constitutionality of the tax law. Mr. Cuomo said on Wednesday that he would file such a suit, claiming that the provision limiting deductibility of state and local taxes amounts to double taxation. Other officials, including the governor-elect of New Jersey, Phil Murphy, are considering similar legal action. But experts say that such lawsuits are unlikely to succeed because they ask courts to read the 16th Amendment, which authorized the federal income tax, very broadly. Further, Congress already restricts the use of the state and local tax deduction through the alternative minimum tax, says Kim Rueben of the Urban-Brookings Tax Policy Center. The new law will reduce the number of people who end up paying the alternative minimum tax.

It is hard to say if any of these maneuvers would be successful. But they could potentially cost the federal government billions of dollars in tax revenue. No doubt Republicans in Washington would be peeved and might try to pass legislation that seeks to outlaw or reduce the effectiveness of these state policies. But that might not be an option if Democrats gain House seats or take control of one or both chambers of Congress in the November election — an outcome that has probably become more likely thanks to the tax law.

None of this should come as a surprise. Republican leaders invited taxpayers and state governments to play tax avoidance games by rushing through an unpopular mess of a tax bill that, over time, will benefit few and hurt many.