A tax policy analyst said Illinois lawmakers might want to reevaluate state and local taxes after a federal judge tossed a suit filed by other high-tax states over a federal cap on state and local tax deductions.
New York, New Jersey, Connecticut and Maryland sued the federal government over the state and local taxes, or SALT, deduction cap of $10,000 from the 2017 tax cut law. Illinois Gov. J.B. Pritzker and governors from other high tax states had supported the suit. Pritzker said in February that not having the deduction affected 2 million people. He said most of those people earned $200,000 or less a year.
A federal judge in New York recently dismissed the challenge.
Tax Foundation Director of State Tax Policy Jared Walczak said the states had argued the cap was unconstitutional and “commandeered the states into changing their tax code into what the federal government wanted it to do.”
“The court did not find any of those arguments particularly compelling,” he said.
Walczak said the deduction essentially meant lower tax states were subsidizing higher tax states where taxpayers used to be able to deduct high state and local taxes from their federal taxes.
“If Illinois chooses to be a high tax state, chooses to impose these burdens, it should be borne by Illinois taxpayers who can vote whether they think that’s the right or the wrong policy,” Walczak said. “It shouldn’t be borne by Indiana or anywhere else in the country.”
Walczak said it was important because Illinois taxpayers will vote on the November 2020 ballot on a proposal to change the state’s flat income tax to a tax with higher rates on higher earners.
“When you combine the federal code with these high state rates you get some pretty high tax burdens,” Walczak said.
Pritzker's progressive tax plan would have rates as high as 7.75 percent for those earning more than $250,000 a year. The higher rate would only apply to income above the $250,000 threshold. The rate would be 7.99 percent for incomes of a million dollars or more. Voters would have to approve a change to the state constitution for such rates to kick in.
The ruling dismissing the SALT deduction cap challenge should be a wakeup call to states like Illinois that have seen population declines, Walczak said.
“We have a number of high tax states that have historically denied that taxes really change decision making, certainly denied that they affect migration, now extremely concerned that if their taxpayers have to bear the burden of their own tax code without it being ameliorated for them by the federal government then [residents are] just going to leave,” he said.
“[The ruling] does give them an incentive to start thinking about their own tax codes because if you want to solve this problem [of outmigration] make your tax code more competitive,” he said.
New York’s governor said he’s evaluating an appeal to the SALT cap lawsuit.
A separate case about various things states are doing to try and work around the SALT cap remains pending. That case centers around funds state and local governments in high tax states are looking to set up to allow taxpayers to donate to and have counted as charitable contributions.
Efforts for such funds in Illinois haven’t advanced.