Blue-state Democrats have a new cause: Helping millionaires

Key Points
  • Some Democrats in blue states are looking to create loopholes to the federal tax rules on state and local property taxes.
  • The so-called SALT provisions say taxpayers can only deduct up to $10,000 in state and local taxes from their federal returns.
  • The cap means many affluent people in high-tax states may see their taxes climb.
Tax hikes, corporate flights and an ongoing trend of economic migration away from the state have deemed Connecticut Gov. Dannel Malloy one of the least popular governors in the nation.
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One of the core beliefs of the Democratic party is fairness. Tax the rich, help the poor and spread the gains of a growing economy more widely.

It has been a consistent message by federal and state lawmakers alike. Until now.

On the heels of the new Republican tax law, state Democrats, who until recently were advocating higher taxes on the rich, are suddenly fighting to protect their own members of the top 1 percent from higher taxes. Some Dems are even proposing both — raise taxes on the wealthy with one hand and help them with the other.

The new divide is the result of the so-called SALT provisions of the new tax law. Taxpayers can only deduct up to $10,000 in state and local taxes from their federal returns. In high-tax states like New York, New Jersey and Connecticut, more than a quarter of one-percenters will see tax hikes under the new cap in 2019. In New York, a whopping 40 percent of one-percenters will see tax hikes under the plan.

The Democratic governors of all three states have passed legislation aimed at helping those one-percenters avoid the new tax provision. In New York and New Jersey, they've proposed a scheme to allow taxpayers to give to charities that support local schools and other government services, and then allow those donations count as tax credits and become tax-deductible.

US added 700,000 new millionaires in 2017
US added 700,000 new millionaires in 2017

Connecticut has passed a law that allows owners of pass-through businesses the ability to avoid the higher taxes with a special tax-credit scheme.

All of these special laws are aimed squarely at helping the wealthy. It's chiefly the high earners and affluent who suffer from the SALT deduction cap of $10,000. According to one analysis, nearly 60 percent of the added revenue from the SALT changes will come from the top 1 percent. While the Democratic politicians still say they're fighting for fairness, the gap is more political than economic — the red-state rich will get a big tax cut while many of the blue-state rich will pay more.

While decrying the federal tax cut as a "massive giveaway for the very wealthy," Connecticut Governor Dannel P. Malloy spearheaded the state's plan to help owners of pass-through businesses (where the wealthy account for most of the income) and help those who want to deduct more than $10,000 in state and local taxes.

New Jersey, however, offers the most stark example of the blue-state shuffle over the rich. Democratic Governor Phil Murphy has criticized the federal tax law and led the state's efforts to help taxpayers avoid the SALT increases. At the same time, he is proposing a tax on new millionaire earners to fund infrastructure and education spending.

New Jersey state Senate President Stephen Sweeney was once a chief supporter of New Jersey's millionaire tax, tweeting about the "long-overdue millionaires tax." Now, following the federal tax law, he said a tax aimed at the wealthy is "the absolute last thing I'm willing to look at."

He said the state can't risk losing more taxpayers to lower-tax states.

"I'm not going to run in and do something that's going cause even more problems for the economy," he told NJ Advance Media.

So it turns out, many Democrats do want to tax the rich — but only to a point.