WASHINGTON — President Trump's budget director on Tuesday offered a spirited defense of a tax reform proposal that would curtail the deduction taxpayers take for state and local taxes, acknowledging that it could do most damage to high-tax states such as New York.
But states such as New York should take responsibility for their own high tax rates — and stop making taxpayers in places such as his home state of South Carolina subsidize them through a break in the federal tax code, said Mick Mulvaney, director of the Office of Management and Budget.
Asked about New York Gov. Andrew M. Cuomo's theory that cutting the deduction could hurt wealthier taxpayers so much that they would leave the state — and leave remaining New Yorkers paying higher taxes — Mulvaney responded:
"Whose fault is that? ... Is it the federal government's fault that New York taxes are so high that they're driving people out of the state?"
Noting that high state taxes have already prompted people to leave New York, Mulvaney added: "I don't think it's up to the federal government to save New York from its bad decisions."
Mulvaney's comments drew a harsh rebuke from Senate Minority Leader Charles E. Schumer, a New York Democrat.
"Sadly, Mr. Mulvaney is using backward logic and fake math to try to hide the fact that the scheme he is promoting will raise taxes on so many middle-class New Yorkers, deflate housing values and lavish unwarranted rewards on the wealthiest Americans and large corporations," Schumer said.
Mulvaney spent a significant share of his 45-minute session with regional reporters fending off questions from reporters from New York and New Jersey. They are among the states that could be hurt the most by a House proposal to limit the state and local tax deduction to the first $10,000 of real estate taxes paid, and a Senate proposal to eliminate the "SALT" deduction entirely.
Cuomo has argued that the proposal could force New Yorkers to pay $16 billion more in federal taxes. He issued a report last week that said 91,041 taxpayers in Erie County alone would suffer under the House's proposal to cut the SALT deduction, with the average taxpayer paying $2,884 more annually.
Asked to explain the move, Mulvaney argued that the existing state and local tax deduction hurts taxpayers in his home state — because, as a low-tax state, South Carolinians have less to deduct and therefore pay higher federal taxes.
"If our lives are entirely exactly the same ... but you live in New York City and I live in South Carolina, why should I pay more federal tax than you do?" he asked. "Because that's the way the world works right now. And I think you could make an argument that that's simply not fair, it's not right ... that the folks who live in the low-tax jurisdictions are actually subsidizing the folks who live in the high-tax jurisdictions."
New York has traditionally gotten far less back in federal benefits than it pays in federal taxes. In 2015, U.S. Census Bureau figures show that federal tax collections per capita in New York were $13,659 -- far greater than the $10,552 in per capita federal benefits.
Meanwhile, the situation was reversed in South Carolina, a low-wage state where the average taxpayer contributed $4,921 to the federal government while per capital federal benefits of $10,791 were greater than in New York.
In response to Mulvaney's comments, New York's governor stressed New York's role as a "donor state" that gives the federal government much more than it gets back.
"Mulvaney should know better and he does," Cuomo said. "I'll make it simple: Just give New York the $48 billion we send to Washington that makes us the number one donor state in the nation and he and the president can do whatever they want with state and local tax deductibility."
Asked about New York's status as a donor state, Mulvaney said: "The system is not set up so that states get back the same amount of money they put in."
And he stressed that if a South Carolinian earned the same amount of money as a New Yorker, the South Carolinian would likely pay more in federal taxes just because the New Yorker would benefit more from the SALT deduction.
"All thing being equal, if I am paying more federal tax than you are, I am subsidizing your high-tax existence," Mulvaney said.
The budget director also cast doubt on another argument that Cuomo and other advocates of the current system make: that by withdrawing the deduction, the federal government would, in essence, be taxing state and local tax benefits, which would do far more damage in a high-tax state such as New York.
"I've heard the folks say you know it's really double taxation," he said. "But I'm like: 'No, we're only taxing you once. Somebody else just happens to be taxing you, but we're only taxing you once.' "
In addition, Mulvaney accused Cuomo of exaggerating the impact of the proposed changes to the SALT deduction. The budget director noted that with the standard deduction nearly doubling to $24,000 for a family of four, far fewer people would need to itemize — and would get a tax break even with the loss of other deductions.
"The governor of New York said this is going to be a tax increase on every single person in New York," Mulvaney said. "That's just not right."
Mulvaney also said he was confident that the GOP tax reform bill -- which aims to lower rates for many individuals while cutting the corporate tax rate 43 percent -- will pass when the House votes on it later this week.
"The atmosphere is pretty positive," he said, contrasting the tax effort with the GOP's failed attempt to repeal and replace the Affordable Care Act. "I could not say the same thing when we were at this point in the process about health care. I think health care was a piece of legislation that was looking for a way to fail. Tax reform is a piece of legislation looking for a way to succeed. I think it's an entirely different dynamic."
Congressional Republicans have vowed to pass tax reform legislation by the end of the year, but they still face several obstacles to doing so.
First and foremost, there's the difference between the two bills over what to do about the SALT deduction. And in hopes of resolving that difference, Sen. Rand Paul, R-Ky., said Tuesday he will introduce an amendment to the Senate bill accepting the House provision allowing deductions of up to $10,000 in property taxes.
“This will help ensure House acceptance of the Senate plan as leaders there have stated they will not accept a plan with no state and local deductibility,” Paul said on Twitter. He also said on Twitter that such a change will ensure that many more Americans will get a tax cut under the bill.
Republicans will also have to resolve several other differences between the House and Senate measures. The GOP will also probably have to overcome unanimous Democratic opposition to the measure, which is why Schumer suggested the GOP ought to start its tax reform effort all over again.
"The Trump administration and our Western New York representatives in Congress should go back to the drawing board and work with us in a bipartisan way to pass real tax reform that will benefit the middle class and grow our economy – because this plan will do neither even while it cruelly hammers New York," Schumer said.