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N.Y. Governor’s Protest of Federal Tax Law Faces Some Resistance Upstate:

Many residents deduct less than $10,000 in state and local taxes and can benefit from the expanded standard deduction.

How will the politics of the new federal tax law play out in high-tax states? It depends where you live. New York Gov. Andrew Cuomo, an outspoken critic of the law, is facing a split over the issue between upstate and downstate, where New Yorkers are expecting different impacts. The new law caps the federal deduction for state and local taxes at $10,000 while almost doubling the standard deduction. That could hurt affluent counties clustered around New York City where residents routinely deduct more than $10,000. But it may help New Yorkers—many of them upstate—who deduct less than $10,000 and can benefit from other elements of the law. Other governors are likely to come up against the same problem as Mr. Cuomo. Taxpayers and small businesses in more conservative, lower-income swaths of their states have embraced the law and are likely to benefit from it in the near term. “We believe the federal tax reform was overall a net positive,” said Zack Hutchins, a spokesman for the New York Business Council in Albany. In other high-tax states, such as California, state lawmakers areexploring steps to soften the blow. On Friday, Mr. Cuomo joined with Connecticut Gov. Daniel Malloy and New Jersey Gov. Phil Murphy, all Democrats, in announcing a shared lawsuit against the federal government over the law. “I’m getting a mixed message, because on one hand the Democrats say, ‘Tax the rich,’” said Ric Lucia, 66 years old, who runs a trucking business in Delanson, an upstate town, and supports the new federal law. “If you’re deducting above $10,000, you’re wealthier. Who would be complaining about losing the Salt deduction? People with $2 million Long Island homes.” The divide, of course, isn’t strictly geographic. The new state and local tax cap affects nearly 500,000 people outside New York City, Westchester and Long Island who previously filed more than $10,000 in such deductions, according to the state’s Office of Budget. A spokeswoman for the governor, Abbey Fashouer, said 1.7 million New Yorkers itemize more than $10,000 in state and local tax deductions. “The federal law—from people losing important deductions, to the state losing economic competitiveness, to the very real potential for tax migration—overwhelmingly negatively impacts New York,” she said. “The governor has laid out a ... plan to protect New Yorkers by challenging the constitutionality of the law and restructuring our tax code.” Mr. Cuomo’s office is arguing that new burdens on the state’s higher earners will have negative impacts because the state’s tax base is heavily dependent on that revenue. “If those wealthy people leave the state, you’re in a situation where you might have to make draconian cuts,” said Morris Peters, state budget spokesman. “That impacts you even if you have never claimed deductions.” Other critics of the federal law have argued that while some New Yorkers may get a tax cut, it will hurt New York as it competes with other states to attract businesses and jobs. The new law also caps the deductibility of mortgage interest, which is expected to hurt the home market around New York City. Through the money New York sends to the federal government, “we are effectively subsidizing the tax reduction that is going to attract our population and talent to other states,” said Kathryn Wylde, president of business group Partnership for New York City, noting that other states will see bigger benefits from the new law. The law has exacerbated an already stark political divide among upstate and downstate that transcends partisan politics. For Republicans and Democrats who represent areas such as Long Island that have depended on the state and local tax deduction, offsetting the consequences of the new cap is urgent. Not so for upstate politicians. U.S. Rep. Tom Reed, an upstate Republican, said “99%” of his constituents are under the $10,000 cap and expect tax relief from the new law. He said the state should cut its spending to lower state taxes if lawmakers are concerned about the people who could be negatively affected by the federal law. Data from the state comptroller show the differences among New York counties in average state and local deductions. In Manhattan in 2015, for example, the average such deduction was $60,300 for those who filed it. Several hours upstate, in Hamilton County, the average was $8,900. But some upstate counties also have averages well over $10,000, like an $18,000 average deduction in Saratoga County. “Just because property taxes are sky-high in Westchester doesn’t mean people think they are reasonable upstate,” said Assemblyman Phil Steck, an Albany-area Democrat who opposes the new federal law. But the emerging support for the tax law in some parts of New York could create challenges for the governor as he tries to rally support in the Legislature for his state-tax overhaul. “We have had discussions with the administration and lawmakers on our concerns,” said Mike Durant, New York director of the National Federation of Independent Businesses, an upstate-based business group. Mr. Cuomo has proposed shifting part of the state’s income tax to a new payroll tax, but the plan is still in its early stages. Analysts said Mr. Cuomo could pull off the shift without hurting people who would otherwise benefit from the federal law. But upstate business owners who said they already feel burdened by other Cuomo initiatives such as a minimum-wage increase and paid-leave requirements are skeptical, concerned such a shift could prove arduous. “If the [payroll tax] proposal goes through, we will consider liquidating and closing,” said Rebecca Lloyd, who runs cement manufacturing businesses throughout upstate and supports the federal tax law. “It won’t be worth it.”