The Republican effort to overhaul the nation’s tax system unfairly penalizes high-tax states and could negatively impact the nation’s economy, Gov. Dannel Malloy, D-Conn., told CNBC on Friday.

The bills passed by the House and Senate significantly curb state and local tax deductions (SALT), which would leave taxpayers in high-tax states shouldering a higher burden.

“This is tough. I’m worried about it on a long-term basis, not only for my state but for our national economy,” Malloy said in an interview with “Power Lunch.”

For one, the changes will cause home values to drop in those states, many of which have high populations, he said.

“You see a 10 percent decline in … the value of homes, that in our country by definition is a recession. Is this what they really want to do?”

Both the House and Senate legislation cap property tax deductions at $10,000, but what will wind up in the final version is unclear. The House and the Senate are currently working on reconciling their two bills.

Dozens of lawmakers from high-tax states are pushing for more generous local and state deductions.

Those who support eliminating or curbing SALT deductions believe that the changes could push those states to lower their local taxes. However, Malloy defended the states’ rights to decide how to spend their money and pointed out that those states pay more taxes to the federal government.

“We are a giving state. Almost every SALT state is a giving state. And who are we giving to? We are giving to states that aren’t having a net contribution to the federal budget,” he said.

Malloy also argued that the high state and local taxes go toward things like subways in New York and an extensive train system in New Jersey.

“You don’t pay for those systems and all of a sudden your economy within those areas and the contribution they make to the federal government declines substantially,” Malloy said.

White House economic advisor Gary Cohn told CNBC on Friday that Republicans are working on appeasing the lawmakers from those high-tax states.

“They have to have a solution that allows their residents to come away from this in a position that allows those members to support this. We’re cognizant of those issues. No one wants to see tax increases. That’s not what we’re trying to do,” Cohn said.

— CNBC’s Jacob Pramuk contributed to this report.


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