Gov. Andrew Cuomo recently complained that the cap on the SALT (state and local tax) deduction is causing people to flee New York. That’s like a recent college graduate complaining that his parents’ decision to cut off his monthly allowance has forced him to get a job and face a budget.
It’s not the new SALT cap causing New Yorkers to flee. Even before the Tax Cuts and Jobs Act limited the SALT deduction to $10,000, 1.9 million more people moved out of New York than into it from 2005 to 2016. Rather, if anything, it would be the state’s high taxes.
At $6,993 per taxpayer, New York’s state-and-local-tax burden is 58 percent, or $2,573, higher than the average burden across the United States.
For very high-income earners, the gap is even wider. According to 2015 IRS tax data, the average millionaire living in New York paid $502,191 in state and local taxes, compared to $71,113 for the average Texas millionaire.
Of course, now that the 40 percent-off sale on state and local taxes is over for America’s highest income earners, they can be expected to look even harder for places that offer everyday low taxes. The cap has left high-tax states no place to hide.
Consider: While New York has a top personal-income-tax rate of 12.7 percent, places such as Texas and Florida boast 0 percent rates — no personal income tax at all.
It’s no wonder that New York ranked worst in net inflow of income, according to the most recent Rich States Poor States Report. For every $1 of income residents leaving the state took with them from 1997 to 2016, incoming residents brought in only 71 cents. In comparison, every $1 that left Florida was offset by $1.75.
Those outflows stem from both people and businesses leaving the state. According to the American Legislative Exchange Council, New York’s top combined state and local business tax rate of 17.2 percent is the worst in the nation.
The main way New York has been able to attract businesses that offer jobs is through selective tax breaks to big businesses. Americans — employers and employees alike — want places that offer freedom and opportunity for all instead of favoritism for a select few.
As more and more people and companies leave New York, the state will have to reach even deeper into remaining taxpayers’ pockets to fund its bloated government. And that will only exacerbate the exodus.
Unless, that is, the state wakes up and confronts its problems by enacting pro-growth policies: low, broad-based taxes; minimal regulations; right-to-work laws; limited government spending; well-funded public pensions; and minimal debt.
Fact is, the SALT deduction actually encouraged states to raise taxes higher than they otherwise would. It’s also extremely unfair, forcing ordinary federal taxpayers to pay for state and local government services they don’t receive — because they’re delivered in other states.
And the deduction almost exclusively benefits high-income earners. The Joint Committee on Taxation estimates that for the 2018 tax year, 86 percent of the value of the SALT deduction will go to taxpayers making more than $100,000 per year.
If New York wants to charge its millionaires more than $500,000, on average, in state and local taxes, why should the federal government grant those millionaires a $185,000 tax break and shift that burden to ordinary American taxpayers, many who make far less?
With the new higher standard deduction of $12,000 for individuals and $24,000 for married couples, only about 11 percent of taxpayers are projected to claim the SALT deduction for 2018 (down from 28 percent for 2017).
President Trump recently indicated that he’s open to taking action on the SALT cap. Instead of eliminating the cap, Congress should eliminate the SALT deduction altogether. Doing so would allow lawmakers to lower marginal tax rates for everyone.
And instead of trying to pass the buck, and blaming Washington for shining a light on high state and local taxes, state lawmakers should consider a better idea: cut taxes in their own states.
As former Rep. John Faso (R-NY) put it: “The solution is to lower the cost of government in New York and make our state a place where businesses can create jobs, so our people don’t have to flee.”
Rachel Greszler is a Heritage Foundation senior policy analyst.
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