Originally Posted: February 2, 2018
The rich will get richer, thanks to the new tax law, and Texas will become an even better destination.
For many years, Texas has been attracting corporations and residents from high-tax states, in part because there’s no state income tax and the cost-of-living remains relatively affordable.
The new tax law will make Texas even more attractive, especially compared with California and New York. Those states, along with Chicago, provide plenty of migrants to Dallas already.
Most of the individual and family savings from tax reform are going to high earners. In Texas, three-quarters of the upside will be claimed by taxpayers earning over $106,000, according to the Institute on Taxation and Economic Policy, a “nonprofit, nonpartisan” research firm in Washington.
To offset those gains — and the hit on the deficit — the law includes a $10,000 cap on deductions for state and local taxes. That feature can punish some residents in high-tax states but has a more muted effect here, even with property taxes rising fast.
The cap on the so-called SALT deduction will affect just 3 percent of Texas taxpayers in 2019, about 386,000 individuals and families, ITEP estimated. That compares with 9 percent of filers nationwide. In New York and California, 16 percent of taxpayers will face the cap — and their hit will be much higher.
The most extreme examples are among the top 1 percent of earners. For them, the cost of capping the SALT deduction will average just under $6,000 a year in Texas. The annual hit on the richest in New York will average almost $107,000, and in California, $87,000, according to data from ITEP.
“It doesn’t apply to everybody, but it matters a lot” to those affected, said Tom Stringer, who lives in Long Island, N.Y. “My world has changed dramatically in the last two months. It’s the same for many of my clients and hundreds of their employees.”
Stringer is managing director of the site selection and incentives practice at BDO in New York. In that role, he helps companies decide where to expand and relocate, and he believes the tax-deduction cap will eventually have a big impact on that process.
“Is it gonna happen tomorrow? No,” Stringer said. “But are the analyses and evaluations happening already? You betcha. And you’ll see the impact on relocations in the next three or four years.”
States whose residents stand to get hit hard by the deduction cap are scrambling to respond. In California, there’s a proposal to count payments over $10,000 as charitable contributions because those donations remain deductible. In New York, the governor is considering an employer-side tax to offset state tax liabilities because employer taxes are fully deductible.
“Both proposals are interesting, but unlikely to succeed for both legal and practical reasons,” wrote Jared Walczak of the Tax Foundation.
With or without such workarounds, it’s not clear how much the deduction cap will bite, said one expert. Even among the 1-percenters, who are much more likely to face the cap, 9 in 10 people nationwide will be getting a tax cut, according to ITEP. And their average savings will be $63,000.
“The cap alone may raise their taxes, but there are so many other things in the law that lower their taxes,” said Steve Wamhoff, senior fellow for federal tax policy at ITEP. “When they’ve just seen their federal taxes go down, are they really going to think about where to move to pay even less?”
Taxes and moving
He said there’s not much evidence that people choose to move to simply save on taxes. That expense is one part of a region’s cost of living, and research on millionaires has found that they don’t relocate to low-tax states, in part because they’ve already achieved economic success.
People may appreciate states that don’t have an income tax, and that’s part of the Texas pitch. But calculating the impact of the SALT cap is pretty complicated, he said, and his conclusion applies to all income groups: “Taxes are not a significant factor in decisions about where to live,” Wamhoff said. READ MORE