A few months ago, the Wall Street Journal reported that Trump’s tax reforms are starting to impact some high-tax states like California.
As a result of the Trump administration’s tax reforms, citizens in high-tax, high-cost of living states like California cannot reduce their tax liabilities by deducting from their federal income taxes for state and local taxes. The state and local tax deduction (SALT) was capped at $10,000.
For new home buyers, there was a reduction in the size of mortgages for which they can deduct — it went from $1 million to $750,000. According to Attom Data Solutions, the average property tax burden in America was approximately $3,500 in 2018. However, The Wall Street Journal noted that “many residents in New York, New Jersey, Connecticut, and California had been deducting well over $10,000 a year.”
High earners in high-tax states tend to be the most impacted by the 2017 tax reforms, but their white-collar professions do afford them some flexibility in moving out. Some are business owners, remote workers, or on the verge of retirement. Given the new fiscal realities, people from states such as California, New York, and New Jersey are now packing up and buying new homes in the much more affordable Sun Belt.
In light of these circumstances, politicians in blue states have been blaming President Trump’s tax reforms for their declining tax revenues. New York Governor Andrew Cuomo criticized the tax cuts, declaring in 2018, “It has redistributed wealth in this nation from Democratic states—we’re also called blue states—to red states.” Not only have tax coffers been hit hard, Chuck DeVore, Vice President of National Initiatives at the Texas Public Policy Foundation, contends that 400,000 private sector jobs may have shifted from high-tax states to low-tax states. Additionally, private-sector job expansion is growing 80% faster in the low-tax states as of 2019.
Does Cuomo have a point? At first glance, it is true that the SALT limits have effectively hamstrung people’s ability to deduct their taxes in blue states. There is some validity to the concerns of blue-state taxpayers, who live in states that are less dependent on federal government funding and effectively subsidize other states by paying the bulk of federal taxes. Some of these states that are least dependent on the federal government include California, Illinois, and New Jersey.
However, the eroding tax base and job displacement occurring in blue states are still the faults of the state governments. The policies that constrict their economic freedom and make their states unaffordable for people of all backgrounds to live in are the primary cause.
That said, SALT shows why the federal tax system needs to be completely overhauled, if not abolished. The simpler the tax system, the better. We wouldn’t have these debates about SALT, other deductions, and tax loopholes if the income tax was scrapped. However, state governments should still take ownership and clean up their fiscal backyards. When more state governments are able to fix their fiscal situation, potential changes at the federal level could actually become feasible.
Engaging in petty political blame games won’t bring any kind of reform though.