In July, New York and several other high-tax states filed suit against the federal tax reform law. For decades, the bulk of the U.S. population essentially subsidized jurisdictions that charged dramatically high rates.
Chuck DeVore, writing in Forbes notes: “Itemizing and deducting SALT on individual federal tax returns was part of the federal tax code from the beginning. But, the tax deduction was also debated from the start. And, in 1986, sales tax deductibility was removed in the Tax Reform Act signed into law by President Reagan. No states successfully sued the federal government at the time over the change to the tax code…Limiting SALT to $10,000 per household has a varying effect on the states based on incomes earned and the state’s tax levels. The Tax Policy Center, a project of the Urban Institute and the Brookings Institution, analyzed claimed SALT deductions for the 2014 tax year, reporting on both the average deductions by state as well as the percentage of federal tax returns that itemized state and local taxes. Their research showed that filers in New York had the highest average SALT deduction at $21,000 with between 30 to 40 percent of filers itemizing their SALT. At the other end of the scale, of the 20 to 30 percent of Alaska filers who itemized SALT, the average deduction was $4,800”
The distinguished author and retired Judge John Wilson describes the dramatic difference between one high-tax state, which he left, and the state he moved to:
There is no doubt that New Yorkers are among the highest taxed citizens in the nation. Currently, the combined state and local tax rate in New York City stands at 12.7 percent of income. Only California has a higher rate at 13.3 percent. The original 13 colonies fought a war of independence against British Rule over taxes that were less oppressive.
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Now, New York, like other high tax and spend states, is feeling the pinch of last year’s Republican tax reform bill. In particular, the federal deduction for the payment of state and local taxes (known as SALT) has been subjected to a cap of $10,000. Before the change in the law, a New York resident could deduct the full amount of his or her state and local taxes.
This change has reportedly led to a 2 billion dollar reduction in taxes collected by New York State for the current fiscal year. While representing less than a 5% curtailment in tax revenue, the panic has already begun. “This is worse than we had anticipated,” New York Governor Andrew Cuomo reportedly stated, calling the shortfall “serious as a heart attack.”
There are just 6 states which represent more than half of all SALT deductions taken across the nation – California, New York, New Jersey, Illinois, Texas and Pennsylvania, with California alone responsible for 21% of the state and local deductions taken. Thus, it’s no surprise that Democratic leaders from these states want to reverse the cap, and keep these revenues flowing. In the meanwhile, this change had led to a renewed interest in relocation from high tax states to more tax friendly jurisdictions. A recent survey showed that a full 53% percent of Californians want to leave the state, with the percentage being as high as 63% among millennials. New York’s Governor Cuomo has taken to blaming Florida for stealing his high-tax paying residents. Currently, the state which has lost the most population is New Jersey, with Connecticut, Massachusetts, and of course, New York, all in the top ten.
The Report concludes tomorrow
Illustration: The Boston Tea Party Ship Museum