Tax Reform Headed to High-Tax States?

Democrat-controlled high-tax states will now be held to account by the GOP's new tax bill.

Political Editors · Dec. 22, 2017

One of the most significant changes brought about by tax reform deals with the amount of state income taxes paid that residents can then deduct on their federal tax returns. This change has received the most vocal protests from the leaders of the high tax states of California and New York. California Governor Jerry Brown called Republicans a bunch of “mafia thugs,” while New York Gov. Andrew Cuomo dramatically complained that the tax law was a “dagger to the economic heart of New York” and that it would ignite “an economic civil war” between high and low tax states.

But who is actually most affected by the GOP tax bill in these high-tax states? The short answer: high-income earners. As the Wall Street Journal explains:

The truth is that few taxpayers even in high tax states will be hurt because they won’t need a deduction beyond the $10,000 state-and-local cap in the bill. Tax writers estimate that only about 5% of households will even itemize their deductions because the bill nearly doubles the standard deduction to $24,000. Most affluent households who do itemize will also be held harmless because of tax-rate reductions.

But the tax math will be tricky for many high-earners in states with the highest tax rates. The bill reduces the top federal tax rate to 37% from 39.6% and increases the threshold at which it kicks in to $600,000 from $470,000 for couples filing jointly. Our friend Don Luskin did the math and says that high earners in states with top rates exceeding 6.56% could see their tax bills increase.

What these high-tax states will be facing is pressure to lower taxes in order to prevent high-income earners from moving out of state. As the Journal further explains:

The problem is more acute when you consider that the top 1% of earners pay nearly 50% of state income taxes in California and New York, and 37% in New Jersey. States may experience significant budget carnage if more high earners defect. To head off a high-earner revolt, Mr. Cuomo could seek to eliminate the millionaire’s tax he campaigned against in 2010 but has repeatedly extended. Mr. Brown could campaign to repeal the 3% surcharge on millionaires he championed in 2012.

Both California and New York, as well as the Democrat-run states of Oregon and Minnesota, for example, may soon be facing an increasing exodus of high-earners to the low-tax pastures.

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