Happy New Tax Year! (Time To Move?)

With the turn of the calendar page to January, it’s not only a new year, it’s a new tax year, too.  And since Congress enacted, and President Trump signed into law, a host of changes to the federal tax code at the end of 2017 that take effect in 2018, people are starting to take a close look at what the tax law changes will mean — and whether they should move to a different state.

hg-salt-blog-finalYes, you read that right:  the new tax laws might cause people to move.  Why?  Because one of the things the law changes is the rules that apply to deductions for payments of state and local taxes.  Before, there was no limit on the deductions for state and local tax payments; now the deduction is capped at $10,000.  Advocates of the recent tax changes argue that the unlimited deduction had the effect of minimizing the impact of higher taxes in certain states.  Now, higher income residents in the high-tax states will feel more of the true impact of the state and local tax bite in their states.

According to CNN, the deduction for state and local taxes primarily helped taxpayers who earned more than $100,000 a year, who received almost 90 percent of the benefit of the deduction.  Moreover, the impact of the deduction was focused on high-income residents of high-tax states.  California and New York residents alone received about one-third of the benefit of the deduction, and more than half of the value of the deduction was focused on tax filers in just six states:  California, New York, New Jersey, Illinois, Texas, and Pennsylvania.  California’s top marginal state income tax rate, incidentally, is 13.3 percent.  In contrast, some states, like Florida, have no state income tax at all.

This difference in state incomes taxes — and the financial consequences it produces — is what is causing some people to forecast that the change to the deduction taxpayers might cause some taxpayers to vote with their feet and flee the high-tax states for tax-friendlier destinations.  And some politicians in the higher-tax states, such as New Jersey, have taken notice and are reconsidering their taxing strategies as a result.

Is changing the deduction for state and local taxes a good thing?  Of course, you’ll get different views on that issue, but some economists argue that anything that muddles the ability of a consumer to determine the true cost of an item interferes with the “invisible hand” and the optimal functioning of the economy.  Will bearing more of the brunt of high state taxes cause Californians to pick up and move next door to Nevada, which has no state income tax?  This year we might begin to find out.