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States exploring tax changes in response to federal overhaul

Associated Press • Jan 8, 2018 at 11:00 AM

(AP) — In New Jersey and California, top Democratic officials want to let people make charitable contributions to the state instead of paying certain taxes. In Connecticut and New York, officials are exploring a switch from income taxes to new ones on payroll. A few governors have even called for tax cuts.

The ideas are bubbling up as state lawmakers begin their 2018 sessions and assess the effects of the Republican tax overhaul that President Donald Trump signed into law last month. Lawmakers and governors in some states are grappling with how to protect their constituents.

The federal policy implements a maze of changes. It cuts tax rates and nearly doubles the standard income deduction. Yet it also caps or eliminates some popular itemized deductions, and sets the personal exemptions to zero.

For many Americans, the result is expected to be lower federal tax obligations, at least initially. Those facing higher bills are expected to be concentrated in some high-tax states.

With legislators starting their sessions and governors writing state budgets, the response is a political priority. The proposals are bold, though not yet fleshed out.

This week, New York Gov. Andrew Cuomo used his state-of-the-state speech to pledge to sue over the GOP tax plan, which he called "an assault" by the federal government. A lawsuit would add taxes to the growing list of Trump administration policies that Democratic states have challenged in court.

Other states have not committed to sue, but some leaders have indicated they'll explore the idea.

"I'm certainly not a constitutional lawyer, but the notion that this is not constitutional is something we want to pursue," said Phil Murphy, New Jersey's Democratic governor-elect.

Officials in California and Connecticut also said this week they were considering legal options.

In high-tax states, officials have been focused on protecting taxpayers from the impact of a new $10,000 cap on deductions for paying state and local taxes. In California, Connecticut, Massachusetts, New Jersey and New York, more than one-third of tax filers claim the state and local tax deduction on federal taxes; the average deduction in each state is over $15,000.

California state Senate President Pro Tem Kevin de Leon, a Los Angeles Democrat who is running for the U.S. Senate, introduced legislation this week that would allow people to make charitable donations to the state instead of paying income taxes. That would allow them to claim a charitable deduction on federal taxes.

"Our hard-earned tax dollars should not be subject to double-taxation, especially not to line the pockets of the Trump family, hedge fund managers and private jet owners," de Leon said in a statement.

Another Democrat, New Jersey Gov.-elect Phil Murphy, announced a similar plan on Friday but said local governments also could implement it and apply it to property taxes.

Kim Rueben, a senior fellow at the liberal-leaning Urban-Brookings Tax Policy Center, said it remains to be seen whether the IRS would allow deductions for that kind of contribution if it's rewarded with tax credits. There is some precedent for it, though: She noted that some states give tax credits in return for private-school scholarships and that the IRS allows deductions of those contributions.

In Connecticut, two Democratic legislative leaders want to replace income taxes on individuals with payroll taxes on employers.

Under the new federal tax law, employers' state and local taxes would remain deductible. House Speaker Joe Aresimowicz and House Majority Leader Matthew Ritter sent a letter Wednesday asking a state commission to evaluate the idea. New York's Cuomo said he's looking at a similar change there.

Rueben said that for the approach to work, states would have to figure out what to do with the income of high-earners who receive money from investments rather than jobs — something Cuomo said he could address through a tax on carried interest.

Nicole Keading, an economist at the conservative-leaning Tax Foundation, said that change also could mean that states would replace progressive income tax structures with flat payroll taxes.

"You would be raising taxes on low-income people," she said.

The measure could be tough to pass this year with Cuomo and all members of the New York Legislature up for election. Assembly Minority Leader Brian Kolb, a Republican who is running for governor, said the state should focus instead on cutting taxes and spending.

"The issues really hurting New Yorkers are self-inflicted wounds," he said.

Governors in some other states are worried that their own current tax policies could inflict pain for taxpayers as a result of the federal changes.

More than 40 states have income taxes, and nearly all of them rely to some degree on definitions from the federal tax code.

Economists expect that many states will see their revenue rise because they tie their tax laws to federal provisions such as those on personal exemptions, which lower the bills based on the size of households.

In Maryland and Michigan, the Republican governors have said they will introduce tax cuts to compensate, after the GOP bill eliminated the personal exemption.

"Protecting taxpayers should be a bipartisan issue, so that's my holiday gift to the people of Maryland," Maryland's Larry Hogan, a Republican, said last month.

Hogan, however, has to work with a legislature led by Democrats, and it's unclear how they will want to respond. Senate President Thomas V. Mike Miller, a Democrat, said the GOP tax plan will have "dire effects" for many Maryland residents.

"Our governor needs to be focusing on how he can join with members of the House and Senate to combat the evils of this federal tax bill," he said.

Last month, Idaho's state Senate leader, Republican Brent Hill, said he was concerned that new state revenue would come disproportionately from larger families because of the elimination of the exemption. He said the state could consider keeping a personal exemption or offering a state child tax credit.

Meanwhile in Colorado, Gov. John Hickenlooper, a Democrat, asked the Legislature last week for $300 million in new spending for the current fiscal year and for the fiscal year that begins July 1. He cited in part new revenue expected under the federal law, which he has criticized.

Hickenlooper wants to use the extra money for roads, schools and the state reserve.

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Associated Press writers Jim Anderson in Denver; Michael Catalini in Trenton, New Jersey; Jonathan J. Cooper in Sacramento, California; Susan Haigh in Hartford, Connecticut; David Klepper in Albany, New York; an Brian Witte in Annapolis, Maryland, contributed to this article.

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