Joseph Spector

Albany Bureau Chief

ALBANY - A House GOP plan to ax a major tax break could be a huge hit to New Yorkers.

Only California benefits more from the federal deduction for state and local taxes, and the cut would be an average $4,500 per household in New York, state officials are warning.

High-income, high-tax states like New York and California would bear the brunt of the federal proposal to eliminate the deduction of state and local taxes, experts said.

If the deduction goes away, 3.3 million taxpayers in New York would see their federal income taxes increase by $17.5 billion, Gov. Andrew Cuomo's office estimated.

"The federal government is reportedly moving to eliminate the deductibility of state and local taxes, which would effectively increase state and local taxes by 20 percent to 44 percent, depending on a person’s tax bracket," Cuomo said in a statement Sunday.

"This would be a deathblow to New York, putting us at a horrible competitive disadvantage."

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Big NY impact

Federal tax law lets New Yorkers deduct $68 billion from their federal taxes, second only to the $101 billion deducted by California residents, according to a report from Tax Foundation, a fiscally conservative group based in Washington D.C.

As a deduction compared to New Yorkers' adjusted gross income, the Empire State benefits the most of any state -- twice the national average, the group's report last month found.

New York Democrats in Congress vowed to fight the change, which is being considered as part of an overhaul of tax policies by Republicans who lead Congress and by the Trump administration.

"This is nothing more than a massive federal tax hike for New Yorkers," Rep. Sean Patrick Maloney, D-Cold Spring, Putnam County, said in a statement.

"I’m ready to get to work on meaningful tax reform but this proposal is ridiculous -- their whole plan basically takes money from the wallets of middle-class families in the Hudson Valley to make the rich and powerful even more rich and powerful.”

Upstate, downstate

In its own 2013 report, Cuomo's office estimated the loss of the deduction would hit the most wealthy areas of the state the hardest. That's because they pay the most state and local taxes, including property taxes that are among the highest in the nation.

The average tax increase, Cuomo's report said, would range from about $2,900 in the Finger Lakes and Southern Tier to more than $5,000 for taxpayers in the Hudson Valley.

Critics of the deduction say it favors high-income and high-tax states at the expense of ones with lower wealth and lower taxes.

"It's no surprise that wealthy states like New York and California would want to retain an element of the tax code that favors them, but the broader question is whether this sort of tax preference is justified," said Jared Walczak, a policy analyst at the Tax Foundation.

He said the current structure may incentivize states to spend more, knowing that there will be a federal deduction for their residents.

"If you think, as many do, that the deduction primarily benefits the wealthy, allowing them to deduct the cost of the government services that they're consuming while passing the tax cost along to the rest of the country, the deduction becomes much harder to justify," Walczak said.

Also, supporters of the change said a good portion of the hit to New York could be offset by proposals in Washington to eliminate the alternative minimum tax and a larger standard deduction, which Speaker Paul Ryan has sought.

A higher standard deduction would help "offset the loss of the itemized deduction for a typical upstate family," said E.J. McMahon, president of the Empire Center, a fiscally conservative Albany-based group.

Battle in Washington

The federal tax deduction has been eyed by Republicans for decades.

In the 1980s under President Reagan, New York Democrats -- including Cuomo's late father, then-Gov. Mario Cuomo -- successfully fought similar plans to dump the deduction.

The current governor has raised the issue in the context on the state's finances, saying it would be another potential blow from Washington. New York could face billions of dollars in cuts in federal aid for programs and services, Cuomo has warned.

When Cuomo met in January with Trump at Trump Tower, he said the tax deduction was one of the key points he made to then-incoming president, a fellow New Yorker.

"There’s a proposal being discussed that would end the deductibility of state and local taxes, for example, which would be devastating on the state of New York, California, etc.," Cuomo said after meeting with Trump on Jan. 18.

New York Democrats in Congress urged the state's nine GOP House members to reject the measure in their conference.

Sen. Charles Schumer said losing the deduction would impact New Yorkers' ability to own a home.

"It will also negatively impact both the regional housing market – driving down values—and the overall economy," he said in a statement.

Claudia Tenney, R-New Hartford, Oneida County, said she wants to balance "simplifying the overly complex U.S. tax code" with ensuring New York taxpayers aren't hurt.

"I am concerned that removing certain deductions that New Yorkers now enjoy will likely have a negative impact on our taxpayers," Tenney said in a statement. "Throughout the coming weeks, I will work closely with my colleagues in the House and Senate to ensure that we provide meaningful relief for hardworking upstate families.”

Sen. Kirsten Gillibrand "opposes this proposal because it would harm hardworking middle class families in New York, and she will fight to stop it in the Senate," said her spokesman, Marc Brumer.