How Will Eliminating State and Local Income Tax Deductions Affect Taxpayers? - NBC Connecticut
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How Will Eliminating State and Local Income Tax Deductions Affect Taxpayers?

In 2014, 28 percent of all federal income tax filers took a state and local tax deduction, according to the Tax Foundation

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    Speaker of the House Paul Ryan looks on as President Donald Trump speaks about tax reform legislation in the Cabinet Room at the White House, November 2, 2017 in Washington, DC.

    House Republicans unveiled a $1.5 trillion tax plan Thursday that eliminates the deduction for state and local income taxes, and caps the deduction for state and local property taxes at $10,000.

    The biggest beneficiaries of the state and local tax deduction — known as SALT — often live in rich suburbs in states like New York, New Jersey and California. Those suburbs tend to be in swing districts held by Republicans, but members of Congress from both parties who represent them lined up in opposition to the bill Thursday.

    "The bill introduced today preserves tax-free 401k contributions and charitable deductions which are critical to many Americans," said U.S. Rep. Frank LoBiondo, R-N.J. "However, the elimination of state and local income tax deductions and the $10,000 cap on property tax deductions would be detrimental to New Jersey residents. Thus this bill is not something I could support in its current form."

    Here's a look at what the repeal of the deductions might mean for individuals and state governments across the U.S.:

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    What are the state and local deductions and who benefits?
    Under current law, taxpayers who itemize their deductions are allowed to deduct nonbusiness tax payments on either state income tax or state sales tax. In 2014, 28 percent of all federal income tax filers took a state and local tax deduction, the Tax Policy Center reported.

    Wealthy taxpayers in high-tax states typically benefit the most from the deductions. Taxpayers who pay more in state taxes benefit because the amount they can deduct from their federal tax filing increases. In 2014, 10 percent of taxpayers with less than $50,000 in income claimed the deductions, compared to 81 percent of with $100,000 in income who did. 

    Wealthy taxpayers tend to benefit the most from the deductions because they are more likely to itemize their deductions, claim higher deductions and reduce their federal tax by a higher percentage because of their high tax bracket.

    But, experts argue the state and local deductions reverberate into local governments and affect low-income people in indirect ways. 

    Under current law, taxpayers who itemize their deductions are allowed to deduct their nonbusiness tax payments on either state income tax or state sales tax, according to the Tax Foundation. 
    In 2014, 28 percent of all federal income tax filers took a state and local tax deduction, according to the Tax Foundation. 
    Do the deductions help local governments?
    As the Tax Policy Center reports, the deductions provide an "indirect federal subsidy" to states by lowering the federal tax burden on their residents. This means states may be more likely to tax residents at high levels if their state-level taxes are offset by a federal tax deduction. States, in turn, use that additional revenue for public services. 

    Without the state and local deductions, "taxpayers in the state might not be willing to pay taxes that are as high because they can't deduct them against their federal taxes," said Kim Rueben, a senior fellow at the Tax Policy Center. 

    In theory, without the deductions, states would be forced to tax residents at a lower rate, decreasing the amount of funds for state-run services like transportation, health care, education and public welfare. 
    "Deductibility of state and local taxes has contributed to the stability of state revenues that are essential for providing public services," the National Governors Association wrote to Congress on Sept. 22. "We encourage you to avoid changes to the tax code that would undermine the ability of state and local governments to meet the needs of the citizens whom we all serve."

    For some conservatives, however, lowering taxes at the expense of public spending is a benefit of repealing the deductions. 

    The Heritage Foundation wrote in 2015 the state and local deductions, "supports detrimental economic policies: high levels of taxation and inefficient and wasteful government spending."