The Federal Tax Overhaul May Boost States’ Bottom Lines, But Some Governors Don’t Want the Money
Any new windfall for states is certain to set off a battle in legislatures about how to spend it.
States may soon see an unexpected windfall of tax revenue as a byproduct of the federal tax law, but several governors have said they don’t want the money.
Several governors have said they anticipate their state will take in more money because of the changes in the Republican tax overhaul, which President Donald Trump signed into law on Friday. The extra money could set off battles in state legislatures over how to spend the unexpected windfall, or whether they should even collect it in the first place.
“It is very clear that due to the loss of several longstanding federal tax deductions and exemptions, Maryland state revenue will likely increase by hundreds of millions of dollars,” Maryland Gov. Larry Hogan, a Republican, said in a statement earlier this week. “Our goal will be to leave that money in the pockets of hardworking Marylanders.”
Most states, including Maryland, are still analyzing the effects of the federal tax revisions on state budgets.
But states could find themselves collecting more money, because Congress eliminated or reduced many popular tax deductions, allowing more income to be taxed.
At the federal level, Congress tried to offset those provisions by lowering tax rates and raising the standard deduction. States often follow the federal government’s calculations for determining how much income should be taxed, but, unlike Congress, they have not changed their tax rates to reflect the smaller level of deductions.
New Jersey Gov. Chris Christie, a Republican with one month left before he leaves office, says he wants state lawmakers to help soften the blow of the tax changes.
“We should make property taxes on our state income tax returns completely deductible in response to what the federal government has done, because if we don’t, it will have an effect on property values in the state,” Christie said.
New Jersey has some of the highest property taxes in the country, and the federal changes will significantly scale back a long-standing policy of exempting state and local taxes from federal taxation. Under the new law, taxpayers will only be able to get an exemption for up to $10,000 of state and local taxes. Beyond that, they’ll pay federal income taxes on the state and local taxes they pay.
For example, Christie says he typically pays $41,000 a year in property taxes. Until now, he’s been able to deduct that from his state and federal income taxes. But under the changes to federal tax law, he would only be able to deduct up to $10,000 on both his state and federal taxes.
“Do you think that’s going to affect property values? You bet it is,” he added. “But we can fix that, and it’s a relatively affordable fix.”
The fix would require the state to stop following the federal rules for state and local tax deductions and create its own so New Jersey taxpayers could deduct the entire cost of their property taxes. That would cost the state $150 million to $170 million, out of a $34 billion budget, Christie said.
A third Republican governor, Rick Snyder of Michigan, also supported a change to state tax law in response to the federal overhaul.
“The federal tax reform is going to cause people’s Michigan taxes to go up. We shouldn’t take the benefit of that at the state level,” Michigan Gov. Rick Snyder told the Associated Press. “We should figure out how to give that back to the hard-working taxpayers.”
Snyder told the AP he is especially worried about the federal law’s elimination of the personal exemption. That exemption excludes a certain amount of income from being taxed for every member of a household. For 2017, it is $4,050 per person. But Michigan also has a $4,000 exemption for each federal exemption.
The changes in federal law could mean a $170 state tax hike for a single person in Michigan, or a $680 hike for a family of four. Snyder said he would propose a fix for the problem in January.
Not every governor wants to turn down the prospect of additional revenues.
In Colorado, the prospect of an extra $196 million to $340 million coming to the state treasury has already set off a fight over how to spend it, the Denver Post reports.
The administration of Gov. John Hickenlooper, a Democrat, said it would come up with plans to spend the new money on education, transportation and building up the state’s reserves.
But Republicans and business groups are pushing for the money to be spent on road improvements, the Post notes, quoting a statement from House Minority Leader Patrick Neville. “Roads are our top priority, and there is no reason why nearly all of this new revenue should not go to widening highways and expanding primary arteries,” he said.
In Connecticut, top officials in the administration of Gov. Dannell Malloy are warning that an expected revenue bump from the federal tax changes could paper over significant problems with the state’s tax structure that still need to be addressed. The state projects it will face deficits of $1.9 billion in 2019-20 and $2.7 billion in 2021-22.
“There’s nothing about these [federal] tax changes that are going to turn things around for us in the next 18 months,” Malloy’s budget director, Office of Policy and Management Secretary Ben Barnes, told the Connecticut Mirror. “I’m concerned that the short-term disruption may give the legislature the mistaken impression we don’t need to address the deteriorating revenues.”