As Tax Reform Panel Recommends Eliminating State & Local Deductions, Schumer Releases Report Showing Devastating Impact On Upstate NY

Over one million taxpayers across New York could see an average tax increase of $3,589 if a recommendation from the Advisory Panel on Federal Tax Reform is made to the tax code, U.S. Senator Charles E. Schumer explained today. Next week, the Panel will formally recommend eliminating the federal deduction for state and local taxes as a way to pay for broader tax reforms.

This idea is an absolute killer for New York, Schumer said. Repealing the deduction would devastate people at all levels of income, from working families of modest means to the uppermiddle class, but would also crush budgets at both the state and local level. As communities face pressures to slash spending, this will hurt our teachers, police, and firefighters who are already squeezed as it is. It would also make it less likely that entrepreneurs will setup shop here in New York, costing many thousands of jobs down the line, because these smart people wont want to locate where taxes are rising and services are declining. Protecting the federal deduction for state and local taxes is my number one priority on the Finance Committee.

Schumer today released countybycounty data detailing how much taxpayers in each county will have to pay if the recommendations become law:

An estimated 159,000 Capital Region taxpayers could pay $538 million more in taxes. The average itemizing household could pay a $3,373 tax increase.

An estimated 139,000 Central New York taxpayers could pay $427 million more in taxes. The average itemizing household could pay a $3,064 tax increase.

An estimated 350,648 Hudson Valley taxpayers could pay 1.7 billion more in taxes. The average itemizing household could pay a $4,872 tax increase.

An estimated 79,000 North Country taxpayers could pay $212 million more in taxes. The average itemizing household could pay a $2,667 tax increase.

An estimated 190,000 Rochester/Finger Lakes taxpayers could pay $625 million more in taxes. The average itemizing household could pay a $3,286 tax increase.

An estimated 97,000 Southern Tier taxpayers could pay $265 million more in taxes. The average itemizing household could pay a $2,758 tax increase.

An estimated 220,000 Western New York taxpayers could pay $689 million more in taxes. The average itemizing household could pay a $3,014 tax increase.

In response, Schumer announced today that he is introducing a resolution in the Senate to defend the deduction. The resolution will be introduced shortly, and if passed, will express the sense of the Senate that federal tax deduction for state and local taxes paid should be retained. Schumer also said he will use his seat on the Senate Finance Committee, which has jurisdiction over all tax issues, to fight any legislative movement to implement the changes into the tax code.

Schumer is also requesting better data from the Internal Revenue Service on the local impact of the proposal. In a letter to Mark W. Everson, Schumer noted that while the IRS collects detailed information for tax returns nationally, the amount of data that they collect and publish on a statebystate or countybycounty basis is far more limited. With the Tax Panel about to recommend the outright repeal of, or significant changes to, important deductions that millions of New Yorkers claim, its essential for members of Congress to understand the impacts that these changes will have across their states not just in their state as a whole. Senator Schumer is calling on Commissioner Everson to greatly expand the amount of information they publish on a statebystate and countybycounty basis, so Members of Congress have a greater understanding of what the Tax Panels recommendations will mean to their constituents.

Schumer today argued that eliminating the deduction for state and local taxes would create a new form of double taxation since repeal would require millions of taxpayers to pay federal taxes on income that is also taxed at the state or local level.

Local taxes have been deductible from the federal income tax since the inception of the federal income tax in 1913. Congress has even taken steps to expand the state and local tax deduction, by reinstating a deduction for state sales taxes for some taxpayers as part of the American Jobs Creation Act of 2004.

The nonpartisan UrbanBrookings Tax Policy Center, has said that that eliminating the deduction could lower support for public services and lead to a race to the bottom in terms of state and local expenditures as states compete to have the lowest taxes in order to attract higherincome households.

In tax year 2003, 43,538,000 taxpayers in the United States took advantage of the federal deduction for state and local taxes, deducting a total of $315.69 billion, thereby saving taxpayers in the United States approximately $88.39 billion in federal income taxes, assuming an average marginal rate of 28 percent for taxpayers who itemize. The top 25 states, led by California and New York respectively, ranked by the number of taxpayers affected, represented 77 percent of the taxpayers affected nationally, and took 85 percent of the total deductions for state and local taxes.

On January 7, 2005, President Bush created the Presidents Advisory Panel on Federal Tax Reform, charged with providing several options for federal tax reform that would simplify Federal tax laws, retain progressively, and promote longrun economic growth and job creation. Last Tuesday, the Panel confirmed publicly that it would recommend the repeal of the federal deduction for state and local taxes, slated to be presented publicly on November 1st. The recommendations will officially be submitted for review to the Department of Treasury for Administration review, which will then decide which of the proposals to pursue.

Click here to view study.