Tax Reform and State and Local Taxation: Recent State Tax Proposals Relating to the Limitation on State and Local Tax Deductions Enacted by Federal Tax Reform

Sullivan & Cromwell LLP - March 5, 2018
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Under the recently enacted federal tax reform, individuals and trusts are limited (significantly in some cases) in their ability to deduct state and local taxes (“SALT”). As a result, states with high state taxes have an incentive to change the structure of their tax laws in order to mitigate the costs of state and local taxes.

In particular, several legislative proposals have been made in California, Connecticut, New Jersey and New York intended to address the limitations on SALT deductibility.  This memorandum discusses some of these legislative proposals, with particular focus on three ideas that have received widespread attention: the use of charitable funds, imposition of employer-side payroll taxes on compensation and entity-level taxation on pass-through entities.  This memorandum also addresses some changes proposed in New York, California and Connecticut related to the conformity of their state laws to federal tax reform.