If Congress fails to extend the provisions of the 2017 Tax Cuts and Jobs Act, it will trigger tax increases for most Americans, affect state economies and change state tax structures, the National Taxpayers Union Foundation reported Thursday.
A new report from the foundation said the biggest tax increases would hit people in Massachusetts ($4,848 annual tax increase), Washington ($4,567), and California ($3,768). But most people would pay at least a couple of thousands of dollars a year more.
Joseph Bishop-Henchman, executive vice president of National Taxpayers Union Foundation and lead author of the report, said state policy makers should take steps to blunt the impact if Congress fails to act by the end of 2025.
“The most obvious impact is higher tax bills for families, but there are further automatic tax base changes, elimination of pro-growth business investment policies, and huge compliance headaches if the 2017 tax cuts expire,” he said. “State lawmakers have control over their own state tax codes and should consider shielding their constituents from some of the fallout.”
The states that would be most affected are Colorado, Connecticut, Montana, New York, North Dakota, New Jersey, New Mexico, Nebraska, Maryland and Oregon, according to the report.
Congress has until the end of the year to take action on the 2017 Tax Cuts and Jobs Act before taxes go back up. Extension of the tax rates and provision of the act is projected to cost the federal government about $4 trillion in revenue.
The National Taxpayers Union Foundation report noted that if the TCJA expires, the standard deduction used by more than 90% of taxpayers will be cut in half, the $2,000 child tax credit will fall to $1,000 and will be phased out for more taxpayers and higher tax brackets will kick back in, as will a lower estate tax threshold.
The report said states would take a hit.
“State governments will see major effects too, and contrary to the opinions of many TCJA opponents, those impacts will be highly detrimental,” according to the report.
If Republicans in Congress make good on President Donald Trump’s promise to extend the expiring provisions of the 2017 Tax Cuts and Jobs Act, the move would add more than $37 trillion to the debt over the next 30 years, including $4.5 trillion in the next decade, without corresponding expense cuts, according to a report from the Congressional Budget Office.
TCJA’s expiration would increase taxes for 62% of Americans by an average of $2,955 per tax filer, according to a report from the Tax Foundation. The National Taxpayers Union Foundation report said 80% of Americans would pay higher taxes if Congress allows the provisions to expire.
“Since states benefited from TCJA-driven economic growth and tax base expansions, expiration means facing the opposite trends,” according to the report. “Reduced federal tax bases will shrink state tax bases, directly reducing state revenues, especially in states that automatically conform to federal definitions of income and deductions.”
The report further noted that TJCA capped the amount of money that could be deducted for state and local taxes, called the SALT cap.
“TCJA capped the amount that itemizing taxpayers can deduct from state and local property and either income or sales taxes, at $10,000 per filer. This SALT cap amount is not adjusted for inflation,” the report said. “Thirty-six states have adopted a ‘SALT cap workaround,’ allowing some taxpayers to continue deducting greater than $10,000 per filer by recategorizing individual SALT payments as business entity SALT payments.”
Just what will happen to the SALT cap remains uncertain. U.S. lawmakers are considering changes to the $10,000 SALT deduction cap as part of their efforts to extend the expiring parts of the 2017 Tax Cuts and Jobs Act. The state and local tax, or SALT, deduction allows taxpayers who itemize when filing federal taxes to deduct certain taxes paid to state and local governments.
“Repealing the SALT cap could cost an estimated $1.2 trillion over ten years, leaving less room for broad-based tax relief,” Demian Brady, vice president of research at NTU Foundation, told The Center Square. “The primary beneficiaries of an increase or repeal of the deduction cap would be high-income earners in high-tax states and cities, while taxpayers in lower-tax states would see little to no benefit.”
The report noted that more than half of the tax reduction benefit of easing the SALT cap from $10,000 to $25,000 would accrue to two states: California ($18 billion per year, or 34.1%) and New York ($9 billion per year, or 17.3%).
