Reality – a new reality – is hitting home as Californians work on their 2018 federal income tax returns.
Some are seeing smaller federal tax bites and bigger refunds, thanks to a more generous standard deduction in the tax overhaul a Republican Congress and President Donald Trump enacted in 2017. But the millions of people who are accustomed to writing off state income tax and local property tax payments are feeling the pinch due to one of the most contentious aspects of the revised system.
It limits deductions for state and local taxes (SALT) to $10,000 on a joint return, which has the intended effect of increasing federal taxes, particularly on residents of high-taxing states such as California and New York.
This week, New York Gov. Andrew Cuomo declared his state collected $2.3 billion less in income tax revenue during December and January than the state budget expected and blamed the shortfall on a flight of high-income taxpayers to states with low or no state income taxes, especially Florida.
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“If even a small number of high-income taxpayers leave, it has a great effect on this tax base,” Cuomo said. “You are relying on a very small number of people for the vast amount of your tax dollars.”
Cuomo and governors of other high-tax states – whose politics tend to be deeply blue – grumbled as the tax overhaul was being written that it would encourage high-income residents, unable to write off state and local taxes, to flee.
“It was politically diabolical and also highly effective,” Cuomo said this week. “And if your goal is to help Republican states and hurt Democratic states, this is the way to do it.”
“They are investors, they have accountants, they are making informed decisions,” Cuomo said of New Yorkers who headed south. “This is going to be the tipping point and people will now be making a geographical change.”
The Wall Street Journal reported Florida is seeing a new wave of well-to-do transplants from New York, New Jersey and other high-taxing states.
What about California and Nevada, which, like Florida and Texas, doesn’t have a state income tax? Both Nevada and Arizona are seeing population spikes.
Former Gov. Jerry Brown pushed a income taxes hike on those in higher brackets, generating a windfall of new revenues and helping him balance the budget. Later, he worried aloud the federal SALT limits could cause the rich to flee. So far, there have been anecdotal accounts of tax flight, but no documented mass exit. That said, it wouldn’t – as Cuomo said – take too many to have an impact.
The top 1 percent of New York’s taxpayers supply 46 percent of the state’s tax revenues. In California, 1-percenters’ share is slightly higher, and our top marginal tax rate, 13.3 percent, is higher than New York’s (8.82).
Controller Betty Yee tracks state tax receipts and expenditures; she reported that through December – the first six months of fiscal 2018-19 – revenues were $2.5 billion under estimates, including a $1.9 billion income tax shortfall.
Is that a blip or a trend?
Dan Walters writes on matters of statewide significance for the public interest journalism organization CALmatters.