The Republican tax reform push in Washington is setting off budgetary alarm bells in high-tax states like New York, California and New Jersey, in the latest political skirmish to pit national Republicans against Democratic state and big-city leaders.

With Republicans intent on shrinking or repealing the state and local tax deduction, California officials are worried that the House-passed tax bill, and the emerging Senate measure, would force local governments to reduce taxes and make big cuts to schools and social services. In New York, where New York City and state revenues are heavily reliant on just a handful of wealthy tax filers, budget watchdogs fear federal tax changes could trigger the flight of those residents. And in New Jersey, plans for a new millionaire's tax, one of incoming Gov. Phil Murphy's biggest campaign promises, are already being reined in as the Democratic-led New Jersey Senate waits on the outcome of any federal tax plan.


"We're going to have to re-evaluate everything" if a federal bill repealing the state and local tax deduction becomes law, New Jersey Senate President Steve Sweeney said Wednesday in Atlantic City. Just days before, Sweeney had said he would make passage of a millionaires tax his chief priority in the new administration. "I'm just saying that what's happening in Washington is concerning the hell out of me,” he added.

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Some national Republicans are reveling in the discomfort their plans are causing in Democratic-led states — and say that those governors and state assemblies should just lower their states’ taxes.

After New York Gov. Andrew Cuomo said last week that GOP plans could lead wealthy New Yorkers to leave the state, Office of Management and Budget Director Mick Mulvaney responded: "Whose fault is that? ... Is it the federal government's fault that New York taxes are so high that they're driving people out of the state?" Mulvaney said. "I don't think it's up to the federal government to save New York from its bad decisions."

In Illinois, another high-tax state, Republican Gov. Bruce Rauner has been relatively quiet on the possible repeal of the state and local deduction, despite pressure from the state’s Democratic senators.

Concerns were heightened this past week after the House approved a sweeping $1.5 trillion tax plan that would all but eliminate the deductibility of state and local income taxes. For leaders in high-tax states, that would mean a rising federal tax burden on many of their highest-earning residents. The tax bill emerging from the Senate would go even further. And while plenty of roadblocks remain, congressional Republican leaders want to secure the long-sought legislative win before the end of the year.

In solidly blue California, Democratic legislators were livid about the impact of the emerging Republican tax bills. Southern California Rep. Ted Lieu fumed that “California will be the biggest loser” from the House bill, since “under this plan, Californians will shoulder the largest net tax increase, at $12.1 billion in 2027.”

Sen. Dianne Feinstein charged that “Californians will be hit especially hard by the elimination of the state and local tax deduction, or what we call SALT. The 6 million California households that claim the deduction could either see their tax bill go up or see cuts to vital services like schools and roads.”

The outrage is backed by data: California residents, by far, are the nation’s biggest beneficiaries of the SALT deductions. In 2014 alone, the SALT deductions slashed Californians’ taxable income by a total of $101 billion — more than twice that of second-place New York, according to the nonpartisan Tax Foundation.

The repeal of SALT could force an uncomfortable tax discussion for high-tax states: Should they consider lowering tax rates, to alleviate the additional tax burden that the elimination of the deductions creates? Or keep taxes as they are — and run the risk of losing wealthy residents who might move elsewhere to soften their tax burden? And for politicians who’ve called for the politically popular idea of raising taxes on the wealthy, would the SALT repeal force them to backtrack?

Forcing the debate

Officials in California now predict that the GOP tax bill could transfer tax dollars paid by millions of Californians to other states — making it tougher for both the state government and local entities to find the revenue for needed services in the future. That’s especially worrisome for California at a time when the Trump administration and the Republican Congress have already proposed to slash spending on other programs, cuts that would further stress the state’s finances.

By approving a plan to take those deductions away from California taxpayers, “it’s going to make it harder for state and local government over time. In the end, people’s appetites for paying taxes aren’t endless — and if you raise their taxes by taking away their deductions, their willingness to be taxed again to fund cut services is going to be harder,” said Chris Hoene, executive director of the nonpartisan California Budget and Policy Center, which last week issued an analysis of SALT impacts on state finances.

The impact could be particularly large on education, Hoene said. “Certainly, it will have a significant impact on funding education in the future, because the taxes people are paying that are already supporting education will go up,’’ which means “it’s going to make it harder to make a case to pay more for education in the future.”

In New York, some city and state officials are privately saying that an elimination of SALT deductions might not lead to new state-level tax cuts but would almost certainly make any plan to raise taxes on wealthier New Yorkers more difficult. State leaders voted last year on a two-year extension of an already-existing “millionaire’s tax,” and New York City Mayor Bill de Blasio has called for another one to help pay for repairs to the city’s crumbling mass-transit system.

“I think it could increase pressure [to lower taxes], but what it certainly will do, I think, is make it a tougher challenge if the city or the state wanted to raise their taxes,” said George Sweeting, deputy director of the city’s nonpartisan Independent Budget Office.

The House and Senate tax bills would hit high-income New Yorkers in different ways, Sweeting said.

“There are certainly some New Yorkers who will do well, even with state and local deductibility reduced,” Sweeting said. “Even within the very high income group, there would be winners and losers. The winners tend to be people involved with private equity, real estate development. The people who earn most of their income from salaries and wages — someone who’s paid a million dollars or more for actually being the CEO of a firm that’s getting a very high wage income, they may not lose, but they definitely don’t do as well as those who rely more on investment income.”

Tax Reform: Who Pays What?

Leaders in the New York State Legislature, who have repeatedly reauthorized extensions of the millionaire’s tax but have never been too keen on the idea of de Blasio’s millionaire’s tax for subway repairs, remained unenthusiastic about the idea on Thursday.

“We’ll see what the Senate does,” said Michael Whyland, a spokesman for Democratic Assembly Speaker Carl Heastie, when asked whether the federal tax plan’s passage would magnify concerns he’s already expressed about de Blasio’s millionaire’s tax idea — or halt plans to raise new taxes altogether.

“This is horrible policy for all New Yorkers. As the speaker has noted, there will be devastating ripple effects throughout the state that will negatively impact all taxpayers,” Whyland said.

De Blasio’s proposed millionaire’s tax for the subway, which would impact about 32,000 New York City residents, would increase the city’s highest income tax rate by about half a percentage point, to 4.4 percent from about 3.9 percent, for married couples whose incomes are above $1 million and for individuals who make more than $500,000.

A spokeswoman for the mayor’s office wouldn’t say whether the mayor would rethink his call for the tax hike but also argued that the federal government’s plan is tantamount to “double taxation.”

“The federal government is now threatening double taxation and asking for even more at the risk of reducing the local services that people have come to rely on. Our tax dollars should stay in NYC, where they actually work for those paying them,” said de Blasio spokeswoman Freddi Goldstein.

Flight risks

In private, some city budget watchdogs said they worry that the elimination of SALT, especially when combined with potential federal budget cuts to social services programs, could increase pressure on the city government to make up the difference with the city’s own funds. It could also shrink the growth of the city’s tax base, drawing fewer high-earners over time, several officials, speaking on background, told POLITICO.

Cuomo, a Democrat who is up for reelection in 2018 and is positioning himself for a possible 2020 presidential bid, said earlier this month that eliminating deductions for state income taxes, as the new federal plan would do, would cause wealthy New Yorkers to flee the state.

In response, the state and local governments would be forced to raise taxes on the New Yorkers who remain, Cuomo said.

"Even if your federal taxes were to go down ... your state tax and property tax will have to go up, because it will hurt the state," Cuomo told reporters on Nov. 6, on a joint conference call with Senate Minority Leader Chuck Schumer. "It will hurt our overall revenues, which are already in trouble. It will make this state less competitive for businesses."

Fiscal watchdogs say the departure of even a relatively small number of high-income New Yorkers could have a massive impact on the state’s tax revenue.

For instance, New Yorkers who make more than $100,000 a year pay 83 percent of personal income tax revenues for the state, while people who earn more than $1 million make up more than 40 percent of personal income tax revenue. And while New York City residents who earn more than $1 million a year make up less than 1 percent of all city taxpayers, those residents together bring in more than $4.2 billion in income tax revenue, or 43.6 percent of all the income tax revenue the city receives.

E.J. McMahon, research director at the nonpartisan Empire Center for Public Policy, said the increase in New Yorkers’ effective tax rate could be the straw that breaks the camel’s back for a slice of wealthy people weighing whether to spend their golden years in New York or elsewhere.

In 2015, roughly 2,500 people in the state had adjusted gross income of more than $10 million, he said. If just one-tenth of them, or 250 people, decided to leave, it would cost the state $700 million.

“These people pay such a huge proportion of the state’s taxes that you don’t need an exodus, you just need a few hundred more people to decide that they’re gonna go to Jackson Hole, Charleston, Boca Raton, to make a huge difference,” he said. “You’ve given them all the reason in the world to think harder about that.”

