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Politics

The GOP tax law doesn't just hurt blue states. It hurts everyone.

Catherine Rampell on

There's a perception out there that the new GOP tax law screws over only blue states.

That's wrong.

It creates huge political problems for almost every state. With relatively little fanfare, Congress effectively sent ticking time bombs to statehouses across the country, which are scrambling to assess and contain the damage.

Yes, it's true that the federal law's new limits on state and local tax deductions disproportionately hurt high-tax, mostly Democratic states.

New York, New Jersey and California are all now exploring workarounds, such as essentially reclassifying state taxes as charitable contributions. (It's not clear yet that the IRS will buy this scheme.)

There are, however, lots of other ways the federal law will scramble blue- and red-state budgets -- and plunge some of them deeper into fiscal and political crisis. During an election year, no less.

 

Why? To keep things simpler for taxpayers, most state tax codes are automatically linked to the federal tax code.

For example, of the 41 states with a broad-based personal income tax, almost all use as a starting point either federal adjusted gross income or federal taxable income. Taxpayers simply take a number they've already calculated while filling out their 1040s, then plug it into their state tax returns.

That means if Congress changes how either of those numbers is measured, it can cause big swings in state revenue, too.

Each state tax code is different and interacts with the federal law differently. Right now there's a lot of confusion and disagreement in statehouses about what this sloppily drafted federal law will do.

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