Breaking The Blue State Advantage

The Blue States like to point out that they pay more in Federal Taxes for lower levels of Federal spending than the Red States.  What they fail to mention is that they pay a lower percentage per person than their Red State neighbors as the Federal Government allows individuals to write off their State and Local Taxes.  Congress just capped that deduction at $10,000.00 per household.  Congress just incentivized high income earners to vote with their feet and abandon blue states with high state and local taxes.

California senatrix Dianne Feinstein noticed this:

The blue states now face a stark choice.  Their current propensity for raising taxes and fees is no longer offset by the Federal Government.  The net exodus of the Middle Class from the Blue States will accelerate and extend into the upper middle class and the upper class as the pain registers.  We have recent examples of this in support:

Good Riddance to the Blue State Model

By James Pierson, American Greatness

The new tax legislation approved this week by Congress and to be signed by President Trump includes a provision that will cap the deduction for state and local taxes (SALT) at $10,000 per household. (Businesses will still be allowed to deduct those taxes as business expenses.) The other provisions of the tax bill—especially the corporate tax rate cut—should encourage investment in the United States and spur faster economic growth. But the cap on state and local deductions may be the most significant in terms of its potential political consequences.

“Boon for the Rich”? Hardly

Up until now, taxpayers could deduct the total expense of state and local taxes from their federal tax bill, a provision in place since the federal income tax originated in 1913. These deductions subsidized high state and local taxes to some degree, or in any case alleviated the burdens of those taxes, especially for wealthy households. The main effect of this provision in the tax law will be to raise the federal tax bill for high income households in blue states like California, New York, Illinois, and Connecticut. The provision will only affect a small share of taxpayers—the 10 or 20 percent that itemize their deductions and previously could claim the full exemption for state and local taxes.

Indeed.  My household has long since reconciled ourselves to retiring somewhere other than our current home in San Jose, California.  The taxes and cost of living were too high to endure on a reduced income stream.  This change will encourage us to do so even sooner, as the implications for property values as other higher income households flee to less heavily taxed havens will not serve our best interests.

The blue states could of course reform themselves of their profligate ways.  But that would be a painful admission of failure.

[Continued]

With the SALT cap in place, governors and legislators in those high tax states will find it more and more difficult to deal with their fiscal problems by raising taxes on wealthy taxpayers and business owners. In the wake of the 2008 financial meltdown, governors in Connecticut, New Jersey, Illinois, and California signed legislation to raise state taxes to deal with financial shortfalls instead of making the more difficult choice to reduce expenditures. This may prove impossible to do in the future, given the incentive that wealthy taxpayers now have to pack up and leave for friendlier tax climates.

The public sector unions will be leading the resistance to any such common sense budget reform.  The more successful those unions are, the worse the eventual crises will be.

[UPDATE]

J P Morgan has added a page to their website which will both show you the impact you should expect and show what moving to a less taxed state would mean for your bottom line.  Hat Tip ZeroHedge.

Wizbang Weekend Caption Contest™
Open Thread; Conference Report On Tax Reform Passes In House, Senate, and Signed Into Law
  • Retired military

    I saw this article this morning. I had also seen the Feinstein tweet. I thought the response was most appropriate.

  • stan25

    Can’t have all of Moonbeam’s butt buddies on the unemployment line. It would look very bad for the deep staters.

  • yetanotherjohn

    What ever you do blue staters, if you flee the high tax insanity of your blue state, don’t come to a red state and then start voting for the same sort of idiots that ruined your previous state. Learn from your mistake.
    Texas hasn’t elected a democrat to state wide office for more than two decades and we have the robust economy to prove it. Don’t mess with Texas.

    • Texas is one red state that will feel the pain as well as their property taxes are quite high.

      Then again our propery taxes here in Santa Clara County are more than the household limit all by themselves. The substantial income tax will be double taxed.

      • Jwb10001

        Well since the deduction is only capped not removed this should only really effect those that it doesn’t really hurt. It also gives high tax states the opportunity to pay for the things they vote for, perhaps changing the way they vote in future. If for example Ca wants to fund illegals put them in their schools and universities great continue to vote for the Jerry Brown’s of this world but remember you’re paying for your sanctuary cities and safe space universities.

        • yetanotherjohn

          I agree. Rough number, in Texas you will have to have a house worth more than $500,000 to notice the cap. Two years ago we bought a brand new house for about $100/sq ft. There are certainly neighborhoods of Texas where the average home is more than $500,000 but that is the exception, not the rule.
          Given the tax cuts, I suspect that you would have to find a fairly odd corner case exception that wouldn’t do as well or better in Texas. Big house might lead you to not getting as much tax cut, but rare would be the case for a Texan to actually pay more.

          • Per Zillow (via teh google):

            The median home value in Santa Clara County is $1,152,000.

        • My lady and I are both native Californians. The fruits and flakes from the other states who moved here are the cause of the current political insanity.

  • Wild_Willie

    The blue states with the highest income tax burden are California and New York. Now we will see how great their state legislatures are at keeping their citizens content. I believe people work for money mostly and not totally loyal to party. This new law will bring those states at the least more toward the center.