WASHINGTON – The Trump administration will likely oppose state efforts to soften the blow of a reduced federal deduction for state and local taxes, the chairman of the president's Council of Economic Advisers told reporters Thursday.
"I would guess that if there is some clever thing the lawyers came up with that made it so that the (tax) code once again plays favorites, that we wouldn't support it," Kevin Hassett, the Trump economist, said.
Hassett's comments came weeks after the New York State Legislature approved a budget that includes two provisions aimed at reducing the federal taxes of state residents who would otherwise see their levy go up under a tax overhaul approved last year by the Republican Congress.
And while Hassett did not detail exactly what the Trump administration might do to stop moves such as those the State Legislature made, his comments are significant. That's because the IRS is expected to review New York's attempt to ease the burden caused by the new federal tax law – and perhaps challenge the state's effort.
Speaking at a breakfast sponsored by the Christian Science Monitor, Hassett offered a full-throated defense of the new federal limits on the state and local tax deduction, which Gov. Andrew M. Cuomo has said could devastate the state's economy.
The new tax code is much fairer to low-income states that can't afford the expensive governments that higher-income states often have, Hassett said.
Under the previous system, where individuals could deduct all of their state and local taxes, "the federal government put its finger on the scale in favor of high tax states," Hassett said.
"In some sense the federal government was taking money from a resident in Mississippi and giving it to the residents of, say, Connecticut to compensate the Connecticut person for the fact that they had a potentially luxurious or inefficient government," he added.
Under the new federal tax bill, taxpayers can claim no more than $10,000 in deductions in state and local property taxes combined with either income or sales taxes.
To limit the impact of that move, Cuomo pushed the State Legislature into making two changes.
First, the legislation allows the state and localities to set up charitable trusts that would collect money from the public and then pass the funds on to government entities. Taxpayers would then be able to claim tax credits for 85 percent of what they give to state trusts and 95 percent of what they give to local trusts.
Second, the new state law allows businesses to opt in to a new payroll tax system where they would, in effect, be paying taxes their employees would otherwise pay. Taxpayers would see no difference in their take-home pay, but their tax burden would shrink because they no longer would be paying state income taxes.
"New York will not stand idle while the federal government takes aim at the economic heart of our communities and takes from the hard-working men and women of this state to benefit this country's wealthy and corporations," Cuomo said at the time of the bill's passage. "This bill ensures protections for New Yorkers against Washington's targeted attack and we will continue to lead this fight and do everything we can to protect the rights and wallets of families across New York."
Cuomo has also vowed to sue to try to stop the tax change, while also working to defeat the Republican New York House members -- such as Rep. Chris Collins of Clarence and Rep Tom Reed of Corning -- who voted for it.
Hassett disputed Cuomo's contention that the tax bill could devastate the New York economy. He said that theory presumes "that the governor is unable to make policy changes that seem informed by economic reasoning" – that is, it presumes that the governor can't cut state spending.
"I know what property taxes look like up in upstate New York, and the state income taxes; it's a very high-tax place," Hassett said. "The question is: What are they going to change?"
But even if New York does not cut government spending, the state shouldn't see the kind of devastating economic impact that Cuomo has predicted, Hassett said.
"For moderate and low income people, it won't really affect them because everybody's going to be taking the standard deduction," which is higher under the new tax code, he said.
As for higher income people, many in the state will pay higher taxes. "And, you know, some may move," Hassett said.
But Hassett noted that state-to-state mobility is at close to its lowest rate in modern times, so he doesn't expect the tax bill to prompt huge numbers of people to flee New York and other high-tax states.
"And so my guess is that it's certainly not going to cause a calamity there," Hassett said.