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Homeowners Lining Up to Pay Early Taxes Is a Sign of Blue-State Pain to Come

FAIRFAX, VA - DECEMBER 28:  Residents wait in line to pay taxes at the Fairfax County Government Center December 28, 2017 in Fairfax, Virginia. Many people are pre-paying their 2018 property taxes before the end of the calendar year in an attempt to blunt the effects of the new Republican tax law's $10,000 cap on deductions for state and local taxes that will disproportionately affect higher-tax, Democratic-leaning states.   (Photo by Chip Somodevilla/Getty Images)
Residents wait in line to pay taxes at the Fairfax County Government Center December 28, 2017 in Fairfax, Virginia.
Chip Somodevilla/Getty Images

First came the winners: America’s largest corporations, calculating how a 14-point drop in the corporate tax rate would impact their bottom line. The answer: Favorably! Over the course of December, dozens of U.S. companies announced stock buybacks and dividend hikes, and a few went so far as to issue raises, bonuses, or promises of major capital investment.

And now, in these frigid waning days of December, come the tax bill’s first visible losers: wealthy blue-state property owners (and the governments their taxes support). In the four days since Christmas, homeowners have lined up at city halls across the Northeast, doing something whose unnatural aspect reveals the scale of damage the tax bill will wreak in the Northeast: voluntarily handing over thousands of dollars in taxes months and months in advance.

Hundreds of people waited on lines at city halls and county seats from Fairfax County, Virginia, to the suburbs of Baltimore, New York, and Boston, trying to pay their property taxes while they remain fully deductible on federal returns. Starting next year, the IRS will impose a limit of $10,000 on all state and local tax deductions.

Of course, the bracket here is pretty limited to a certain privileged class: homeowners who not only have enormous property tax bills but also the money and the wherewithal to pay them in advance. It is overwhelmingly a wealthy group, and one concentrated in a handful of Democratic states and counties. Real estate taxes make up only about a third of SALT deductions, but they are easy to pay in advance. And if filing now means taking $10,000 off your 2018 tax return, a little dead-week trip to the Finance Department could save you thousands on next year’s taxes.

So it’s not surprising that early payers are dedicating a few hours to fixing cash-flow issues in cities, suburbs, and counties up and down the Northeast Corridor, and in Illinois, Texas, and California as well. On the one hand, it’s hard to drum up much sympathy for the winners of a home price run that has sent the collective value of real estate in the Los Angeles metropolitan area, to take one example, higher than the GDP of the United Kingdom.

On the other hand, this week’s frenzy is a preview of the staggering collective impact that’s just beginning to dawn on state lawmakers. Taxpayers in Los Angeles County pay—and deduct from federal returns—more than $2.7 billion in property taxes each year. In Manhattan, the figure is $1.7 billion. In Westchester County, New York, which has the highest average deduction in the country, the total is $1.5 billion.

Little of that will still be deductible under the plan. Add it up with state income taxes, which make up nearly two-thirds of SALT deductions, and you’re looking at a phenomenon that will feel like a big federal tax hike—but will be taken out on state and local politicians, since blue-state taxpayers have no power in Washington. The burden has already scared pols off one new spending idea, a New Jersey millionaire’s tax for education, as fear of a wealthy-resident exodus to lower-tax locales grows.

Studies show that won’t happen. But that doesn’t mean it doesn’t affect politics in places like Connecticut, to take one state that has shied away from taxing hedge funds to shore up the budget. Wary of the impact on state finances, New Jersey Gov. Chris Christie issued an executive order this week ordering the state’s municipalities to accept pre-payments for at least the first half of 2018. New York Gov. Andrew Cuomo has done the same. And then the IRS on Wednesday warned that only 2018 taxes that had been assessed in 2017 would be eligible for deduction this year, meaning that anyone paying an estimate was merely making a five-figure, interest-free loan to their local government.

This illustrates two things: first, the consequences of a hastily written tax bill whose ambiguity put billions of dollars at stake during this nine-day window between passage and the new year. Expect lawsuits. And this is, in the scheme of the tax bill, a relatively small loophole.

Second, it hints at the enormous reckoning that is coming for the nation’s biggest states, where a federally deductible, high-tax model has enabled the maintenance of stellar university systems and the expansion of the safety net despite Washington’s retreat from public spending.

Blue-state legislatures face a fork in the road. They can restructure their budgets to work better under the new system. Economists analyzing the conference bill in December noted that states could redirect the burden to state taxes that remain deductible—such as employee payroll taxes or taxes on pass-through businesses. Or they could make use of a loophole that, while running contrary to the spirit of the tax bill, might abide by the letter of the law: Simply instruct taxpayers that all the property and income taxes they can’t deduct can instead be made in the form of a charitable gift, which remains deductible, to something like New York Public Schools Donation Fund.

But if they don’t do something like that, a raft of anti-tax candidates may spring from places like Nassau and Fairfax counties. They’re Democratic now, but haven’t been for long. The tax bill was the spark, but it’s blue state budgets that will burn.

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