A Ticking Tax Bomb (Part II)

In Stories by Tom McManus and Arny DiLaura

This concludes a two-part essay; see the first installment in the January 18 edition of the Ridgefield Press or click here.

Two features of the new federal tax law (“TCJA”) — passed without a single Democratic vote — are designed to hurt states like Connecticut, and especially towns like Ridgefield. (We outlined the reasons in Part I.)

Reduced limits on deductions for mortgage interest and state and local taxes (“SALT”) increase the-tax burden for those in high income “donor” states — like Connecticut — whose taxpayers have long contributed much more to federal coffers than their states have received in federal programs. It is widely acknowledged that the Republican-only tax writers targeted donor states for even higher taxes. The hit is especially severe in localities — like Ridgefield — that support quality education and other essential services.

The new lower limit on mortgage interest deductions could make a significant portion of homes in Ridgefield tougher to sell. The impact may not be immediately evident (depending on the current mortgage) but it hits home values by increasing the after-tax cost of ownership.

The cap on SALT deductions takes effect immediately. In Ridgefield, real estate taxes alone will cause half of homeowners to hit or exceed the $10,000 cap; whatever more they pay in state income taxes will take a bigger bite from their own wallets.

The situation in nearby states is similar to that of Connecticut; each needs to restructure its tax system to ensure the sustainability of state programs. A white paper prepared for N.Y. Governor Andrew Cuomo observes: “the elimination of full state and local deductibility rolls back a basic tenet of federal tax law that has been part of the modern federal income tax since it was created in 1913.”

Fairfield County towns like Ridgefield are “donors” too (contributing much more through state taxes than they receive from Hartford), forcing a rising portion of the school and town budget onto its real estate tax base.

Is there any relief in sight? Several of our elected officials — including First Selectman Rudy Marconi — recognize the challenges that the new law poses to town residents and are working diligently to devise solutions to maintain the tax base, critical to providing high quality education, safe and reliable infrastructure, and other essential services.

One approach being considered is for taxing jurisdictions to accept charitable contributions — which are not subject to a federal cap — in lieu of tax payments. From a town’s perspective, the amounts would be identical; but a taxpayer might thereby retain the deduction that has been embedded in federal code for over 100 years. While creative, this is controversial; even so, it is something for taxpayers to monitor.

Another approach being studied is for states to apply a payroll tax to employers that might substitute for workers’ income tax on wages.

Regardless of the outcome of these strategies, they are at best palliatives that might reduce the impact of Republican targeting. 2018 will be a critical opportunity for voters to say “Enough!” to Republican control of Congress, state houses and legislatures … and, eventually, the White House.

The Ridgefield Democratic Town Committee provides this column. Tom McManus and Arny DiLaura are members of the DTC’s editorial committee.