Experts say elimination of state, local deduction may help N.H. taxpayers

Monitor staff
Friday, November 24, 2017

It’s become one of the more contentious pieces of the Republican effort to reform the tax code.

But as Republican lawmakers from New Jersey and California bristle, New Hampshire policy experts say the proposed elimination of SALT – the state and local tax deduction – could benefit the Granite State.

Under the present code, American taxpayers may exempt all income, sales and property taxes paid to their state, country and town or city from their taxable income, with few limitations. The deduction largely benefits residents of income richer, tax-heavy, generally-Democratic states like New York and New Jersey.

With no sales or income taxes, New Hampshire benefits substantially less from the deduction. Eliminating the exemption, some argue, could even the playing field, and strengthen New Hampshire’s appeal for those concerned about tax rates.

The idea is simple: Rather than face a new uptick in federal income tax caused by the elimination of de

duction, taxpayers may opt to move to New Hampshire and evade state income taxes to begin with, said Greg Moore, New Hampshire state director for Americans for Prosperity.

A long and proud opponent of “broad-based” taxation, New Hampshire has made its property-tax reliant system central to its brand. An April study by the website WalletHub found that New Hampshire has the fifth lowest tax burden in the country – residents in the state pay on average the fifth lowest percentage of their income to state taxes. Vermont and Maine, in contrast, have the third and fourth highest burdens respectively, according to the site; Massachusetts, at 18th highest, lies in the middle.

Eliminating the SALT deduction, Moore argues, could make that contrast stand out for residents of other states. And for Moore, it’s a question of basic fairness.

“We are a state that takes a lot of pride in our low tax environment,” he said. “But because other states get this benefit in a better way than we do, our state subsidizes those states.”

In 2017, the state and local income tax deductions will amount to $100 billion nationally, according to a projection from the Committee on Joint Taxation. That money, Moore contends, must be made up through other taxes that, in aggregate, disadvantage the Granite State.

Beyond New Hampshire, for Republican legislators forced to adhere to procedural revenue balancing constraints in order to evade a filibuster and pass the reform, that $100 billion is an attractive source of revenue.

Of course, not every state sees it this way. Throughout the bicameral tax reform negotiation process, eliminating the SALT deduction has proved a tough sticking point. A cluster of 11 House Republicans, many representing districts in high-income tax states, nearly derailed the House version of the bill. The House version passed Nov. 16 only after a compromise allowing a $10,000 deduction for state property taxes.

In contrast, the Senate Bill, expected to be voted on next week, extinguishes the SALT exemptions entirely. Instead, Congress has proposed a simple fix: the standard deduction, which would be doubled in both the Senate and House versions of the bill.

Eric Herr, chairman of the board at the New Hampshire Center for Public Policy Studies, said the idea that the elimination of SALT could help the state has merit.

“Whatever form (the changes) take should work to make New Hampshire relatively attractive,” Herr said. “We are a low-tax, low-public sector spending state.”

One demographic group Moore said the reform could affect is those who live in New Hampshire but commute to Massachusetts for work. Though salaries are generally higher in the Bay State, the inability to deduct the 5.5 percent income tax could convince some people living on the margin to work closer to home, within New Hampshire.

But there are caveats. For one, the SALT deductions tend to be used largely by people who already have high incomes, for a simple reason – wealthier people choose to itemize their deductions; lower income people opt for the standard deduction. If the standard deduction is doubled, that could balance out any advantage taken away by the loss of SALT.

For those working in Boston that may not easily find an analogous workplace in New Hampshire, there’s little incentive to leave, Herr pointed out.

And if New Hampshire has one of the lowest overall tax burdens, it still has the highest property tax burden as a percentage of income, according to the WalletHub study. For those looking to buy homes, the inability to deduct the state’s notoriously steep local property taxes – at least in the Senate version of the bill – could provide a new barrier.

But for Moore, the deduction will still provide a spotlight on New Hampshire’s tax code, whatever the ultimate end-result for migration.

“Everything is incremental,” he said. “There’s no silver bullet.”

(Ethan DeWitt can be reached at edewitt@cmonitor.com, or on Twitter at @edewittNH.)