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.

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Taxes, Forms, Worksheets, And Instructions

It’s April 15 — Tax Day.  For many Americans, it’s an angst-filled day, as they rush to complete their taxes and get their forms filed before the midnight deadline.  Even for those of us who are already filed, it’s not a day to celebrate.

Every year, the process of completing tax forms seems to become more complicated and more overwhelming.  Taxpayers juggle federal, state, and local forms, labor through increasingly lengthy instructions, and strive mightily to interpret myriad weird descriptions of deductions, credits and “adjustments to income” to determine whether they have any application to our lives.  This year, the on-line IRS instruction booklet for the 2012 Form 1040 comes in a PDF that is a mind-boggling 214 pages long.  And if you don’t think you need to read every instruction because common sense answers most of the questions, consider this:  according to the instruction at page R-1 of the Form 1040 booklet, for purposes of the credit for the elderly, the IRS considers you to be 65 the day before your 65th birthday!  Somewhere, there is an sober bureaucrat who will give you an earnest explanation of why that approach makes perfect sense.

Although we make the most fun of the federal forms and instructions, for many of us the state and local forms and instructions are just as bad.  This year I had the good fortune to review the New York forms and instructions.  The basic New York personal income tax form, the IT-201, is four pages long and includes 19 separate line items for federal income and adjustments, 5 line items for “New York additions,” 9 line items for “New York subtractions,” 4 line items for deductions, 9 line items for “tax computation, credits, and other taxes,” 13 line items for “New York City and Yonkers taxes, credits, and tax surcharges,” and 14 line items for “payments and refundable credits.”  The on-line instructions for the form comes in a PDF that is a hefty 72 pages long.

Of course, those are just the forms for personal income tax.  I can’t even begin to imagine the complexity and pain involved in filing tax returns for a small business.

With the multiplicity of forms and the confusing instructions, it’s not surprising that many people turn to tax preparation services for help.  According to estimates, about 60 percent of taxpayers seek professional help, and some 800,000 people are employed in helping us prepare our tax returns.  If you add in the various people employed by the IRS and state and local tax agencies to receive, process, and audit our forms, more than 1 million Americans likely earn their living through some tax-related job.  That’s why some people say that “flat tax” proposals that would eliminate all of the deductions, adjustments, additions, surcharges, and other confusing entries are job killers.

I’m sorry if simplifying the tax form completion process would cost some people their jobs, but it simply makes no sense to have Americans fight through these ludicrous forms and instructions every year.  Congress, state legislatures, and local governments should roll up their sleeves, get rid of the special interest exclusions, deductions, and adjustments, and get us to a tax system that is simple and straightforward.  If you want people to pay their taxes — and we should want people to pay their taxes — make the process easy to understand and therefore easy to comply with.