Tax Reform Package - Let the Games Begin

Some states, including California, are already beginning to work with tax strategists to identify methods to mitigate the impact of the loss of the state and local tax deductions for federal tax purposes.  The governors of high income tax states such as California, New York and New Jersey are in close contact with one another to work towards a solution for higher income tax payers who may be hurt by the loss of these deductions and they are already coming up with some creative workarounds.

One option being considered is to completely eliminate the state income tax system and replace the lost revenue via increased payroll taxes.  States would tax corporations an amount approximating how much state income tax an employee would have paid under the current system.  This would allow corporations to get that lost tax deduction transferring it from the individual to the corporation and enhance revenue in these states.  I do wonder about possible fallout from unintended consequences here, what moves corporations may make in response.

Another option on the table for these states is to allow public school systems to be recognized as 501(c)3 organizations.  The thinking here is that the portion of property taxes, currently slated to be capped along with state income taxes on a combined basis at a $10,000 deduction on your federal tax return, relating to schools would be allowed as a charitable deduction.  That’s a very creative solution to help individual taxpayers get over the new and increased standard deduction limits slated at $24,000 for joint returns, $18,000 for single parents and $12,000 for individuals.

Also, some governors are already investigating possible legal action against the Federal government under the premise that this tax reform package violates the protection of states’ rights under the U.S. Constitution.  So sit back, open a bag of popcorn and continue watching as certain states maneuver and assess what actions they might be able to take to help preserve some of the status quo with respect to these state and local tax deductions.