President Trump and Republicans in Congress are working hard to turn their proposed tax reform framework into law. One controversial part of the current proposal involves ending the itemized deduction for state and local taxes. Although the provision applies to taxpayers across the nation, policymakers have pointed out that because of the differences in the ways that the 50 states raise tax revenue, taxpayers in certain states will on average see a bigger impact from the loss of the deduction.
As it happens, the following six states -- which represent the ones where taxpayers are able to deduct the largest percentage of their adjusted gross income -- have one thing in common: their electoral votes in the 2016 presidential election went to Trump's opponent. That has made some policymakers look more closely at the politics that might have been involved in adding this provision to the reform package.
No. 6: Oregon
Oregon residents have an average adjusted gross income of almost $60,000, and 36% of the state's taxpayers itemize their deductions. On average, those who itemize their state and local taxes reduce their adjusted gross income by 7%, which is well above the national median level of 4.5%.
Oregon has one of the highest state income taxes in the U.S., with a top marginal tax rate of 9.9%. Although the state doesn't have a sales tax, it ranks near the middle of the country in terms of property taxes collected. Just 39% of voters cast their ballots for President Trump, compared with 50% for his Democratic rival.
No. 5: Maryland
Maryland has a much higher adjusted gross income on average than Oregon, weighing in at about $72,750. That gives more than 45% of Maryland taxpayers the opportunity to itemize their tax deductions, and state and local taxes helped them reduce their income by 7.7%.
Maryland's tax system doesn't seem all that draconian on its face, with a top income tax rate of 5.75%. However, Maryland's counties impose their own income taxes as well, and all told, total state and local individual income tax collections per capita are the third-highest in the nation. Add to that a 6% sales tax and property taxes that are in the top third of states in the U.S., and you can see just how much Maryland residents get taxed at the local level. Trump lost Maryland 60% to 34%.
No. 4: California
California is notorious for its high taxes, but its residents also enjoy a higher overall standard of living than much of the nation. Average adjusted gross income is almost $74,000. Just over a third of California taxpayers itemize deductions, and among those who do, state and local tax breaks give them a 7.9% reduction in their income.
California income tax rates are higher than anywhere else, with a maximum marginal rate of 13.3% on those with incomes of $1 million or more. Sales taxes of 7.25% are also at the top of the nation, and slightly more modest property taxes aren't nearly enough to take California off the list of heavily taxed states. In the 2016 election, President Trump got less than 32% of the vote, compared with almost 62% for his opponent.
No. 3: Connecticut
Connecticut's proximity to New York City gives it the highest average adjusted gross income of any state, topping $93,800. More than 41% of residents itemize their deductions. The state and local tax deduction lets Connecticut residents reduce their income by 8.3%.
In addition to a nearly 7% top income tax rate, Connecticut has one of the highest property taxes in the U.S., and its sales tax rate of 6.35% ranks in the top quarter of states across the nation. Trump lost Connecticut by roughly 55% to 41%.
No. 2: New Jersey
New Jersey also enjoys the positive impacts of having a tax base near major metropolitan areas like New York City and Philadelphia. Average adjusted gross income is more than $81,000, and more that two-fifths of its taxpayers itemize deductions. The state and local tax deduction helped those itemizers cut their income by 8.7%.
New Jersey's tax structure is high in nearly every way. Individual income tax rates top out at close to 9%. Sales taxes of 6.88% at the state level are in the top three nationwide, and property taxes are the highest of any state in the union. New Jersey voted 55% to 41% against President Trump in the 2016 election.
No. 1: New York
New York tops the list of states hit by the loss of the state and local tax deduction. Average adjusted gross income within the state comes in at around $79,250, with 34% of taxpayers itemizing their deductions. Those who do itemize get a 9.1% reduction in adjusted gross income as a result of the state and local tax deduction.
New York has a top income tax rate of 8.82%, average state and local combined sales taxes of nearly 8.5%, and property taxes in the top five of states across the country. Despite Trump's Manhattan residence, the president lost the state 59% to 37%.
The policy reasons for eliminating state and local taxes
Despite the obvious political implications, there are legitimate policy reasons for eliminating deductions for state and local taxes. Many have criticized the deduction as favoring the rich, and the fact that these six states have incomes that rank them near the top of the nation makes it logical that they'd be among the biggest losers from tax reform.
Others point to the fact that allowing deductions for state and local taxes effectively results in a federal subsidy for state spending. That issue becomes more inherently political as it touches on the decisions that various states make about their relative level of government spending and services, but some economists also argue that the provision can lead to suboptimal allocation of financial resources if it favors less efficient government services over more efficient alternatives.
What motivation President Trump had for proposing to eliminate the state and local tax deduction might never be entirely clear. As lawmakers look to firm up the reform package, residents in these six states will be looking closely to see if this key deduction will truly go away.
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