Tax law early blue-state boom

Some of the biggest critics of President Trump’s tax cut package are turning out to be among its biggest beneficiaries, at least in the short term, as blue state taxpayers raced to make preemptive payments to beat the 2018 tax season.

The states said the surge in collections is good for now but shows that residents fear being left behind by new tax laws over the long run.

“The fact that taxpayers are going to such lengths demonstrates just how devastating the federal tax changes are to many New Yorkers,” said Robert Mujica, New York state’s budget director.

Lawmakers from blue states complained bitterly about a $10,000 cap on deductions for state and local taxes because residents’ local tax bills often exceed that limit.

Some blue states have considered changing their own laws to try to give residents tax breaks to avoid the $10,000 cap.

In the meantime, taxpayers are rushing to figure out the best time to pay.

Connecticut Gov. Dannel Malloy, a Democrat, estimated that personal income tax collections will exceed his administration’s projections for December and January by $900 million — much of that from residents prepaying state taxes for 2018.

Mr. Malloy called the development “very promising news for the state,” though budget rules allow for only $10 million of the windfall to be used to help offset a projected $200 million state budget deficit. The rest will go to a rainy day fund.

New York also received higher-than-expected tax collections in December, Mr. Mujica said.

In the District of Columbia, more than 11,000 taxpayers have prepaid their 2018 property taxes, for a total of more than $80.6 million, according to the finance office.

That is way above the pace from the past two years. In 2015 and 2016, a total of 173 people prepaid those taxes, for an amount of $2 million in 2015 and $1.3 million in 2016.

In California, personal and corporate income tax payments were about $3.9 billion — 32 percent — above projections in December.

But the state legislative analyst’s office said those higher collections could be offset by lower numbers in January and April, “as some taxpayers may have made final 2017 tax payments a few months early in order to maximize deductions under the recently passed federal tax plan.”

Tax professionals and analysts have mixed opinions on whether early payments will be beneficial.

The IRS guidance said an individual’s property tax liability has to be assessed and paid in 2017 for it to be fully deductible.

That could negate the anticipated deductibility benefits if people are simply estimating their own projected liabilities, said Nicole Kaeding, an analyst at the Tax Foundation.

“For many who already prepaid, the benefit of their action is simply providing an interest-free loan to their municipality,” Ms. Kaeding wrote recently.

High-tax states complained about the $1.5 trillion bill Mr. Trump signed into law last month, saying they felt targeted. Some states have even thought about suing, arguing that the law is unconstitutional because some states’ residents might not benefit as much as others.

States also are looking at workarounds.

Ideas include shifting some state income taxes, which are subject to the cap, to employer-based payroll taxes, as well as allowing taxpayers to donate money to a new state fund and deduct those payments from their federal taxes as charitable contributions.

House Speaker Paul D. Ryan, Wisconsin Republican, dismissed the notion that such workarounds would be feasible. He said it’s unlikely the IRS would allow people to pay their taxes as donations to charity, for example.

“It is beyond reason to think that tax regulations would allow that to happen,” Mr. Ryan said in a C-SPAN interview last week. “So I don’t even think we would have to legislate to prevent those kinds of workarounds.”