SALT and Schools

Wednesday, November 1st, 2017 at 11:09 am by

New York State had a narrow escape from potential catastrophe when Republican efforts in Washington to repeal and replace the Affordable Care Act failed once again in September. The Cassidy-Graham proposal would have stripped billions of dollars in Medicaid funding from the state budget and jeopardized health care coverage for an estimated 2.7 million New Yorkers, including perhaps one million children.

A new threat has emerged in the form of federal tax reform. Last week the House of Representatives passed an outline of federal budget for 2017-18 which envisioned ending deductibility of state and local taxes, referred to as “SALT.” Any reduction in SALT deductibility would be damaging for New York State and ultimately for schools. House leadership now plans to release its actual tax reform legislation this week.

SALT has been part of the federal personal income tax since its inception, including a temporary tax collected during the Civil War. House Speaker Paul Ryan has said it has the effect of subsidizing high tax states. But in fact New York already sends $41 million more in taxes to Washington than it receives in federal spending, making it the largest “donor” state in total dollars and fourth largest in per capita terms. New York sends an average of $2,070 more to Washington for every man, woman and child than it receives in return, according to a report from State Comptroller Thomas DiNapoli.

Earlier, the Cuomo Administration estimated that ending SALT would have an effect equivalent to raising state and local taxes by 20 to 44 percent, depending on the taxpayer’s tax bracket. That impact could be offset other changes for some taxpayers.

Reportedly, the House tax reform legislation will propose retaining deductibility for only property taxes, not income taxes. Preserving deductibility of income taxes is crucial for our state. Comptroller DiNapoli’s office reported last week that New Yorkers claimed $51.7 billion in deductions for income taxes, roughly two and a half times $20.9 billion for property taxes in 2015.

The new compromise would also have the perverse effect of creating an incentive for states to rely more on regressive property taxes to support public services and reduce reliance on the more progressive income tax.

Anything short of completely preserving full deductibility could be devastating for New York, because of unique aspects of public finance in our state.

[UPDATE:  The House introduced its tax legislation on November 2; it would eliminate deductibility for state and local income taxes and cap deductions for property taxes at $10,000. The Senate bill, introduced on November 9, would fully eliminate SALT deductions.]

The personal income tax (PIT) is the state’s largest revenue source. One percent of taxpayers generate 42 percent of the state’s PIT receipts. For these high income taxpayers, the loss of state income tax deductibility is unlikely to be completely offset by other tax changes. This could drive more of them to leave the state, impairing the state’s ability to maintain support for public services.

School Aid is the state’s largest general fund expenditure. Significant damage to its largest revenue source – the PIT – would inevitably hurt School Aid and harm is likely to be greatest for the poorest communities which have the least capacity to offset inadequate state aid through local revenues.

Looking at school districts represented by one of the only two House members from New York to vote for the House budget resolution last week is illustrative.

Twenty-seven of the state’s representatives in the House voted against the budget resolution last week, including all 20 Democrats and seven of nine Republicans.

Voting for the House budget were for the plan were Chris Collins, representing most of the northern half of Western New York (excluding Buffalo, a few of its suburbs, and most of Niagara Falls) and Tom Reed, representing the southwestern corner of the state from Lake Erie to Ithaca.

School districts in the counties represented by Congressman Reed are mostly poor and heavily dependent on state aid, making them especially susceptible to the fallout from ending or reducing deductibility of state income taxes. The typical school district in counties represented by Congressman Reed relied on the state for 68 percent of of total revenues in 2015-16.

This entry was posted on Wednesday, November 1st, 2017 at 11:09 am and is filed under Finance, National Policy, State Budget. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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