CEPR

For Immediate Release: Tuesday, February 13, 2018
Contact: Karen Conner, 202-293-5380 x117, This email address is being protected from spambots. You need JavaScript enabled to view it.

Blue states, liberal states, democratic states, whatever you call them, the new federal tax law was written specifically to punish those states with relatively high taxes designed to provide broad, high-quality public services. The new tax code limits the amount of state and local taxes (SALT) that can be deducted from federal taxes to $10,000 per filer, per year.

There is a way to circumvent the vindictive tax law. It is described in detail in, “State Payroll Taxes: A Tool for States to Circumvent the Republican Tax Plan,” released today by the Center for Economic and Policy Research. The report’s author, senior economist Dean Baker, said: “the Republican-led Congress and administration has abandoned longstanding norms of fairness, effectively declaring war on more liberal states.” In fact, New York Gov. Cuomo just announced legislation “allowing employers to opt-in to a new payroll tax system to protect their employees from Federal tax increases.”

High-income, and even many middle-income, homeowners in blue states like New York are likely to deduct more than $10,000 limit from their federal taxes. Under the new Republican tax law, these homeowners will pay substantially more federal income tax as a result.

The tool described in Baker’s report is an employer-side payroll tax. This tool takes advantage of the fact that the state and local tax deduction is capped for individual earnings, but not for businesses. Rather than deduct state taxes from individual employee payrolls, employers would deduct the amount of state taxes from employee wages and pay it forward to the state. The state still gets the tax income, the employer gets to deduct 100 percent of the state withholdings from federal tax, and workers have no state income tax liability.

There are two bonuses for workers. Because workers’ wages will be reduced by the amount that was deducted in state tax, their federal taxable income is less. Thus their income, Social Security, and Medicare deductions will also decrease. Even workers who don’t itemize deductions will still pay less in federal income taxes, Social Security, and Medicare taxes.

States also win with this tax law hack. By putting more money in workers’ pockets, an employer-side payroll tax will boost state economies. “There is a substantial amount of money at stake, so if this money stays in the pockets of workers in the state rather than being sent to Washington, it can provide a healthy boost to a state’s economy,” said Baker. “A state-level employer-side payroll tax gives liberal states a weapon with which to fight back. They should take it.”
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