Connecticut Leaders Urge Rollback For Cap on State and Local Tax Deductions

Gov. Ned Lamont, alongside the Democratic governors of New York, New Jersey, Illinois, Oregon, California and Hawaii, issued a letter last Friday imploring President Joe Biden to support a repeal of the federal cap on state and local tax deductions. 

The Tax Cut and Jobs Act, signed into law in 2017 by then-President Donald Trump, placed a $10,000 cap on SALT deductions for federal tax filings. As a result, high earners in higher-tax states like Connecticut would be able to deduct only half of local property taxes, for example, from their federal taxes.

The governors described the cap as a form of “double taxation” that will cost 11 million Americans $670 billion over a decade.

“In Connecticut, which pays more to the federal government and receives back 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 support of eliminating the SALT cap, but Biden has yet to take a stand, as he pushes forward on his $2 trillion infrastructure plan. Repealing the SALT cap would reduce federal revenue by nearly $80 billion a year.  

“If Democrats want to propose a way to eliminate SALT, which is not a revenue raiser, as you know; it would cost more money, and they want to propose a way to pay for it, and they want to put that forward, we’re happy to hear their ideas,” said White House Press Secretary Jen Psaki said last Thursday. 

The SALT cap primarily affected wealthier residents of Connecticut, but Amber Moore, partner at Norwich CPA firm Goldblatt Bokoff, said the effects were felt beyond just the state’s upper echelon. 

“It’s very easy for a middle income married couple in Connecticut to hit that cap and have no federal benefit from the high state and local taxes they’re paying,” Moore said. 

Connecticut’s median home value is just over $275,000, which translates to a median effective property tax tax of $5,898. According to an analysis from the Tax Foundation, Connecticut’s state-local tax burden per capita, which includes property tax, is $9,705, just shy of the $10,000 cap. 

New Haven Mayor Justin Elicker also emphasized that the financial health of Connecticut’s municipalities relies on wealthier residents being able to afford to live, and pay property taxes, in cities. 

“It’s fair to say that this impacts high and middle income people more, but that indirectly impacts the city as a whole,” Elicker said. “As mayor, it is abundantly clear just how important real estate taxes are to ensuring that we are able to provide services to the entire city, and residents paying high real estate taxes in New Haven are an important part of the city’s overall financial health.” 

Richard Pomp, a professor at the University of Connecticut School of Law who specializes in tax law, finds the political debate over the SALT cap interesting, given the inversion of the usual politics on taxing the rich.

“There is a delicious irony in this whole thing, because you have politicians who normally want to increase taxes on the wealthy championing the repeal of the cap, which would help the wealthy,” Pomp said. “This is the essence of progressive taxation, because you have higher income states paying more in federal taxes, and more of the benefit going to lower income states.” 

Still, Elicker said he’s heard from many New Haven residents that the burden of property taxes makes it challenging to afford living in the city.

“It’s already difficult on many of our residents, because our property taxes are so high, that for residents then not to be able to deduct the full amount on their federal tax returns adds an additional burden financially and makes us less competitive as a city and state,” Elicker said. “Our property taxes are pushing people out of the city, and when people look at their overall financial picture, it’s easier for them to manage property taxes if they’re able to deduct them from their federal taxes.”

Norwich Mayor Peter Nystrom, a Republican, said he hears similar concerns about the property tax burden from residents of his city, one of the poorest in the state. 

“The government takes more than its share, so if there’s a way to alleviate the tax burden, I support it,” Nystrom said. “People in Norwich are concerned about the property tax here.” 

In one of the state’s wealthiest towns, Greenwich First Selectman Fred Camillo, a Republican, said he hears from residents around tax season each year who are frustrated that they can no longer deduct their full property taxes from their federal return. 

“I believe in expanding commerce and free enterprise, and encouraging people to invest their money, and that really was a disincentive to investing in property,” Camillo said. “I would love for them to go back to the way it was before the $10,000 limit. Anything that takes away something that’s slowing down economic activity, I’m all for it.” 

Elicker said that the SALT cap could have long term, negative effects on New Haven’s financial outlook. 

“In some neighborhoods in New Haven, people are paying $15,000, $20,000, even $35,000 in real estate taxes annually,” Elicker said. “We need individuals in that category to continue paying taxes in New Haven. If they’re not able to take the full deduction off of their federal taxes, they’re more likely to choose to purchase a house elsewhere.” 

Elicker also emphasized that while repealing the SALT cap would help New Haven, reforming the state’s restrictions on how municipalities can collect income is also key to improving the financial outlook of Connecticut’s cities. 

“Cities in Connecticut are heavily reliant on property taxes, because we can’t collect income or sales tax and are limited on the fees we can charge,” Elicker said. “Municipalities across the nation are allowed by their host states to collect revenue in a variety of ways and that makes the impact of the SALT cap less significant.” 

For Connecticut House Republican Leader Vincent Candelora, while any tax break would be welcome, the potential cost of removing the cap may not be worth the benefit.

“In a vacuum, the removal of the cap would certainly help encourage charitable giving,” Candelora said. “A cap on deductions gets crowded out with taxes, and nonprofits end up suffering from that, because the incentives to donate to nonprofits are certainly diminished. But in the big picture, those caps were passed along with a tax package that was favorable to residents around the country, so at what cost would an elimination of that come to our taxpayers?”

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