New York Business Owners Sidestep Billions in Federal Taxes With State’s Help
This is the title of an article by Richard Rubin that appeared in the January 11, 2022 Wall Street Journal.
In 2017, the Tax Cuts and Jobs Act limited the state and local tax deduction (SALT) to $10,000. Previously, it had been unlimited. This means that wealthy taxpayers who paid more than $10,000 in state and local taxes could no longer deduct on their federal income tax 1040 and reduce their federal taxes the full amount that the states were charging them. In states with high state income and property taxes, this resulted in a significantly higher federal tax bill for many high-end taxpayers.
This SALT cap was pushed by Republicans to help offset the income tax losses to the U.S. Treasury caused by the increase in the standard deduction to $24,000 and the reduction in the top income tax rate from 39.6% to 37%.
Many of these high tax states are represented by Democrats, and they’re alarmed. They’re afraid that the SALT cap will cause their wealthiest residents to flee to states with low property taxes and no state income tax. Their fears are well-founded. Many have already done so.
Now that Democrats are in the majority, they’re trying to raise the SALT cap from $10,000 to $80,000. They’ve inserted that provision into their Build Back Better Act.
According to the nonpartisan Committee for a Responsible Federal Budget, a family of four in Washington making $1 million per year would receive 10 times as much tax relief next year from expanding the state and local tax deduction as a middle-class family would receive from another provision in the social policy package, an expansion of the child tax credit. Citing calculations from the nonpartisan Urban-Brookings Tax Policy Center, the group said that two-thirds of households making more than $1 million a year will receive a federal tax cut.
In the meantime, 22 states have passed laws that allow small business owners to exclude billions of dollars that would have been subject to federal income tax under the 2017 SALT rules.
Mr. Rubin states:
- New York business owners are saving billions of dollars in taxes by using a state-approved system for sidestepping the $10,000 federal cap on SALT deductions.
- If these New York business owners have an average federal tax rate of 32%, they would be saving more than $3 billion in federal income taxes.
- Regardless of the actual federal income tax percentage. the federal government loses money and the rest of us are having to make up the difference in higher tax rates or fewer deductions.
- New York and several other states also filed a federal lawsuit alleging that the cap is unconstitutional. So far, that’s failed at both the district and appeals court levels. Last week, the states asked the Supreme Court to hear the case.
That’s not the case at all. On November 9, 2020, the IRS released Notice 20-75 which actually condones this action by the states to provide a higher deduction to their wealthiest citizens.
There’s no argument that it’s beneficial to these high tax states to try to hold on to their wealthy taxpayers by giving them the ability to reduce their federal tax burden without having to move to a low tax state. There’s also no argument that giving wealthy taxpayers this break means that other less wealthy taxpayers will have to make up for the lost revenue.
For the 90% of U.S. taxpayers who do not itemize and simply take the standard deduction, if we owed $10,000 in state and local taxes, we would have to earn between $11,000 and $15,000 in order to net that $10,000.
Under the FAIRtax, there is no federal income tax and therefore, there is no deduction for state and local taxes. However, with the FAIRtax, everyone, not just the wealthy, would receive a great benefit. Everyone would receive 100% of their income and pay no federal tax until we make retail purchases of new goods and services. Also, state and local taxes are not subject to the FAIRtax.
So, with the FAIRtax, if you owe $10,000 in state and local taxes, you’d only have to earn $10,000, not the $11,000 to $15,000 you’d need under the current system, in order to pay your state and local tax bills. Everyone is treated fairly! WHAT A CONCEPT!
This is not popular with the Ruling Class and its minions in Congress. They’re making a lot of money selling special tax benefits to wealthy donors, and the FAIRtax would eliminate that lucrative income source.
So, the Ruling Class instructs its minions in Congress to call for taxing the wealthy and tries to drive a wedge between us. However, this arrogant attempt to increase the SALT cap in the Build Back Better Act and to support the state actions that benefit only the state’s wealthiest citizens tells us that they have no interest in “helping the rest of us.”
18th century philosopher and economist Edmund Burke said, To tax and to please, no more than to love and to be wise, is not given to men.
We all know that this is true. We all want to keep more of our money so we can provide a better standard of living for ourselves and our families. We can certainly understand why the wealthy would seek to take advantage of whatever tax savings they are offered. However, we want taxes to be fair. That means they are paid by everyone--not just by those who cannot afford to purchase special treatment.
The great operatic tenor Robert Brault said, The IRS is an agency modeled after the revenue raising concepts of the 19th century economist, Jesse James.
Truth be told, it’s not really the IRS that’s at fault here. Yes, some IRS employees do seem to delight in wielding power and trying to intimidate honest taxpayers. However, the only reason that the IRS exists at all is that the Ruling Class keeps it in place and continues to add thousands of pages to an already incomprehensible Internal Revenue Code. Our federal tax code has long since passed the point where even highly trained and highly paid tax professionals don’t really understand it and often can’t agree on what it says.
On the other hand, the FAIRtax is collected by the states. There would be no more need for the IRS under the FAIRtax.
Isn’t it time that our elected Members of Congress:
- Stopped spending their time providing tax benefits to special interest groups for which the rest of us pay.
- Began devoting their time to solving the real problems that affect our country and all of its citizens.
- Stop trying to control us by giving or withholding income tax benefits.
- Pledge that all federal taxes will be paid when new retail goods or retail services are purchased.
WHAT CAN EACH OF US DO?We can write letters and make calls to our elected representatives and attend Zoom town hall meetings demanding that if they really want to allow Americans to “TAKE BACK CONTROL”, the first step is to eliminate the income/payroll tax system and enact the FAIRTAX!
We all should remember Edmund Burke’s warning that applies to our efforts to TAKE BACK CONTROL, “Nobody made a greater mistake than he who did nothing because he could do only a little.”
If you want to prevent the IRS from being further weaponized to punish those of us who may object to the D.C. opinions and dictates of what is good for us, then help us PASS THE FAIRTAX!
The IRS will be gone and we will pay our taxes when we make purchases. WE and not D.C. Elites will decide how much federal tax we pay!
If you have friends who don’t know about the FAIRtax, send them to FAIRtax.org. Have them watch the white boards under “How It Works” and, if they agree, ask them to please join us.
Then contact your Members of Congress and the President and demand that Congress pass -the FAIRtax—the only fair tax.
Remember, if we don't continue to tell the truth and demand a change, then this quote from George Orwell's 1984 may foretell our children's future:
“If you want a picture of the future, imagine a boot stamping on a human face—forever.”
Is it hopeless? When confronted with a seemingly impossible problem, remember the statement attributed to the author George Bernard Shaw who wrote, You see things; and you say “Why?” But I dream things that never were; and I say “Why not?”
Isn’t it time for us to ask, “Why not?”
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