GOP tax plan viewed with suspicion

A federal tax reduction plan on its surface seems like a win-win situation, an opportunity to bring home more money from a hard-earned paycheck. But the local reaction to the GOP tax cut plan out of the Senate in Washington is one of trepidation.

For many, it evokes memories of the Ronald Reagan era, when federal taxes were ostensibly cut, but, in fact, deductions were removed, such as the ability to deduct credit card interest. The Reagan era tax code left a bad taste in many mouths, and the same thing seems to be happening now in the era of Donald Trump.

“Republicans have gone on the record repeatedly to make clear their top priority — passing a tax cut bill for their rich donors, paid for by tax increases on the middle class, as quickly as possible, with no public input. This latest bill is a disaster for Connecticut,” said U.S. Sen. Chris Murphy (D-Conn.).

“It will raise taxes on tens of thousands of middle income families in order to provide a disgustingly giant tax cut for corporations and the super rich. I am all for tax reform that simplifies the tax code and actually lowers taxes for the right people, but this bill, written behind closed doors, does the opposite. I will oppose it with all my energy.”

Specifically, Murphy said, his constituents are concerned about the GOP plan’s elimination or reduction — depending on their income and which plan passes — of deductions for state income taxes and local property taxes, which would have the effect of reducing their discretionary income.

It would raise the after-tax cost of owning a larger home or vacation home, which might soften the pricing of larger homes that these mortgages finance, said Wilton Board of Finance Chair Jeff Rutishauser.

"I don't agree the Republicans think it will force towns to reduce property taxes — it is just raising the after-tax cost of owning a larger home or vacation home, which may soften the pricing of larger homes," he said.

“My understanding is that the GOP tax plans under consideration either eliminate or limit the amount of state and local tax [SALT] that can be deducted against the federal return. That will hurt residents of high-tax states like Connecticut,” Rutishauser said.

“But, in general, all the tax ideas being proposed are financially disadvantageous to higher income earners in high-tax states like Connecticut and owners of expensive homes and second homes financed with mortgages. Both of those are found in Wilton.

"The only way reducing eliminating SALT deductibility or limitation will force towns to reduce property taxes is if we in Wilton decide to significantly cut our educational and municipal services to the town, thereby reducing property tax, that would be up to the citizens of Wilton to decide,” Rutishauser said.

Another potential element of the GOP plan is to remove the ability to deduct mortgage interest on federal income tax returns — for example, after the first $10,000 — or perhaps altogether.

Either way, that would affect Wilton because there are expensive large homes here and tax bills of $20,000 or more a year are common.

“Losing the home interest deduction is going to encourage rentals, and we are in a market that is struggling already,” said Realty Seven broker and owner Peg Koellmer.

“Young buyers will decide to wait a couple of years. Businesses that own rentals are able to continue taking the deduction because they are businesses and not individuals, and that will encourage a rental market over a purchase market. It is absolutely concerning.

A couple of things remain unclear for the moment — what will pass and how people at different income levels will be affected.

This seems to be creating a climate of uncertainty in the markets.

“If a plan passes that does increase the tax liabilities of people in the income range who might be potential buyers of Wilton real estate, this could affect demand, which would in turn affect property values,” said state Rep. Gail Lavielle (R-143), “but I think it’s too early to tell.”

State Rep. Tom O’Dea (R-125) said if the deduction for state taxes is eliminated, it will hurt real estate values in high-tax states, which certainly include Connecticut.

“This would be yet another reason to reduce spending and cut taxes,” said O’Dea. “Connecticut needs to get its fiscal house in order ASAP.”

In a statement following reports that the Senate Republicans’ tax proposal would fully eliminate the state and local tax deduction, U.S. Sen. Richard Blumenthal (D-Conn.) said if the House bill “was bad for Connecticut families, the Senate plan is worse.”

“Completely eliminating the state and local tax deduction is a partisan ploy to punish states like Connecticut, devastating families who save thousands each year and communities that benefit from the support it provides for local services,” said Blumenthal.

“This huge tax hike on the middle class won’t be offset by any of the paltry tax credits Republicans claim may help working families, while saving the biggest benefits for the top one percent. This tax proposal is fundamentally unfair and fiscally irresponsible — a massive tax cut for the wealthy that leaves the rest of America holding the bag.”

True tax reform, Blumenthal said, “should help all Americans get ahead.”

“Until Republicans commit to a responsible, transparent, and bipartisan process — and pledge to protect the most vulnerable Americans — I’ll stand strong against this monstrous proposal,” he said.

In response to the Republican tax bill that passed the House, several key members of the New Democrat Coalition, including U.S. Rep. Jim Himes (D-Conn.), released a statement claiming that the bill “puts large corporations and the ultra-wealthy ahead of sick Americans, students, teachers, veterans, seniors, and the estimated 47.5 million Americans who will see a tax increase by 2027.”

“If that isn’t enough,” the statement continues, “the bill leaves our children and grandchildren to pay off over $1.7 trillion in debt.”

Instead of pursuing this bill, Himes and others said, “we should be working together to simplify the tax code, support workers and enable them to invest in themselves and their jobs; promote innovation, entrepreneurship, and new business formation; and spur infrastructure investment.”

Blumenthal said the tax plan should be dead on arrival in the United States Senate.

“It is a classic bait-and-switch — the proof is going to be in people’s paychecks, where many will see even higher taxes,” he said.

“The people who benefit the most from this deal are the wealthiest,” said Blumenthal, while the people who lose the most are the working poor and the middle class.

Blumenthal said Connecticut would be especially hard-hit by this proposal because it means limited deductions for state and local taxes, and no deduction for interest paid on student loans.

“And on top of everything else,” he added, “the threat of higher healthcare costs for millions of Americans.”

The bottom line is that Wilton stands to be affected.

“The arguments put forth in support of the elimination of the state and local tax (SALT) deduction are one, the SALT deduction operates as a subsidy from low-tax states to high-tax states, and two, its elimination would put pressure on state and local governments to lower their taxes,” said First Selectman Lynne Vanderslice.

“However, in Wilton, we develop the mill rate based on the cost of services we are either required or expected to provide. In order to offset the effect of eliminating the SALT deduction, we would need to reduce town services.”

This task would be “particularly difficult,” said Vanderslice, “as we are in a time when the state is reducing funding of services, grants and aid and pushing the cost of those services and aid onto the town.”

“We again experienced such a little more than a week ago when the governor announced further cuts as a result of the $880-million lapse in the recently adopted budget,” she said.

If Congress eliminates the SALT deduction and the state lowers taxes in response, Vanderslice said, it’s very likely that the state will take the same approach and push even more costs onto the town.

“The federal government cannot solve Connecticut’s fiscal crisis. The right solution is for the people of this state to elect legislators and a governor serious about addressing the crisis,” said Vanderslice, adding that Wilton’s town government is serious about reducing and controlling costs.

More than $200,000 of reductions to the approved budget have been identified in the current year. Elimination and reorganization of staffing, including town employees assuming the responsibilities of the former Board of Education finance director and facilities positions, will generate a total permanent annual savings of more than $350,000 in labor costs spread across the Board of Selectmen and Board of Education budgets, she said.

The fiscal year 2017 actual operating expense results were more than $400,000 under budget, Vanderslice said. That budget was more than $200,000 less than the fiscal year 2016 budget. FY 2016 actual results were $1 million under budget.

Editor's note: An earlier version of this story, also printed in The Bulletin, omitted key parts of Mr. Rutishauser's quote, which now appears in full.