Governor Ned Lamont, along with the Democratic governors of New York, New Jersey, Illinois, Oregon, California and Hawaii issued a letter last Friday calling on President Joe Biden to support the lifting of the federal cap on state and local tax deductions.
The Tax Cut and Employment Act, signed by then-President Donald Trump in 2017, put a cap of $ 10,000 on SALT deductions for federal tax returns. As a result, high earners in higher tax states like Connecticut, for example, could only deduct half of local property taxes from their federal taxes.
Governors called the cap a form of “double taxation” that will cost 11 million Americans $ 670 billion in a decade.
“In Connecticut, which pays more to the federal government and gets less per capita than any other state in the nation, taxpayers paid $ 1.3 billion more in additional federal income taxes because of the SALT cap.”
Senate Majority Leader Chuck Schumer and House Speaker Nancy Pelosi have both spoken out in favor of lifting the SALT cap, but Biden has yet to take a stand as he pushes forward his $ 2 trillion infrastructure plan. The lifting of the SALT cap would cut federal revenues by nearly $ 80 billion a year.
“If Democrats are going to propose a way to get rid of SALT, this, as you know, is not a source of income. It would cost more money and they want to suggest a way to pay for it and they want to bring that forward. We look forward to hearing your ideas, ”said Jen Psaki, White House press secretary, last Thursday.
The SALT cap primarily affected wealthier Connecticut residents, but Amber Moore, a partner in Norwich CPA firm Goldblatt Bokoff, said the effects were being felt beyond the state’s cap.
“It is very easy for a middle-income couple in Connecticut to hit that limit and not get federal benefits from the high state and local taxes they pay,” Moore said.
The median home value of Connecticut is just over $ 275,000, which translates into a median effective property tax of $ 5,898. According to an analysis by the Tax Foundation, Connecticut’s per capita state tax, including property tax, is $ 9,705, just below the $ 10,000 cap.
New Haven Mayor Justin Elicker also stressed that the financial health of Connecticut communities depends on wealthier residents being able to afford to live in cities and pay property taxes.
“It’s fair to say that this affects people with high and middle incomes more, but it has an indirect impact on the city as a whole,” Elicker said. “As mayor, it is very clear how important real estate taxes are to making sure we can provide services to the entire city, and residents who pay high real estate taxes in New Haven are an important part of the city’s overall financial health. ”
Richard Pomp, a professor in the University of Connecticut School of Law who specializes in tax law, finds the political debate on the SALT cap interesting in the face of the reversal of conventional policies on taxing the rich.
“There is a delicious irony in this whole thing because there are politicians who usually want to raise taxes on the rich, who want to see the cap lifted, which would help the rich,” said Pomp. “This is the essence of progressive taxation as higher-income states pay more federal taxes and more of the benefit to lower-income states.”
Even so, Elicker said he had heard from many New Haven residents that the burden of property taxes made it difficult to afford life in the city.
“It’s already difficult for many of our residents because our property taxes are so high that the fact that residents are then unable to deduct the full amount from their federal tax returns puts an additional financial burden on us as a city and the city makes the state less competitive, ”said Elicker. “Our property taxes are driving the people out of town, and when people look at their bigger picture, it’s easier for them to manage property taxes when they can deduct them from their federal taxes.”
Norwich Republican Peter Nystrom said he heard similar concerns about the property tax burden from residents of his city, one of the poorest in the state.
“The government is taking more than its share. So if there is a way to reduce the tax burden, I support it,” said Nystrom. “The people of Norwich are concerned about property taxes here.”
In one of the state’s richest cities, Republican Fred Camillo, Greenwich First Selectman, said he hears every year around tax season from residents who are frustrated that they can no longer deduct their full property taxes from their federal returns.
“I believe in growing trade and free enterprise and encouraging people to invest their money and that has really been a barrier to real estate investment,” said Camillo. “I would love it if they got back to what they were before the $ 10,000 limit. Anything that takes away something that slows down economic activity, I am for it. ”
Elicker said the SALT cap could have a long-term negative impact on New Haven’s financial prospects.
“In some parts of New Haven, people pay $ 15,000, $ 20,000, or even $ 35,000 in real estate taxes annually,” Elicker said. “We need people in this category to keep paying taxes in New Haven. If they are unable to get the full deduction from their federal taxes, they are more likely to choose to buy a home elsewhere. ”
Elicker also stressed that while lifting the SALT cap would help New Haven, reforming state restrictions on municipal income collection is also key to improving Connecticut’s cities’ financial prospects.
“Connecticut cities are heavily dependent on property taxes because we cannot collect income or sales taxes and the fees we can collect are limited,” said Elicker. “Municipalities across the country are allowed to generate revenue from their host states in a number of ways, making the impact of the SALT cap less significant.”
While a tax break would be welcome for Connecticut House Republican leader Vincent Candelora, the potential cost of lifting the cap may not be worth the benefit.
“In a vacuum, removing the cap would certainly help raise funds for charity,” Candelora said. “A cap on deductions is becoming overburdened with taxes, and nonprofits suffer because the incentives to donate to nonprofits are certainly lower. But, by and large, these caps were passed along with a tax package that was favorable to the country’s residents. At what cost would eliminating these costs be incurred for our taxpayers? “