New York’s governor called it an “economic arrow” aimed at his state. A New Jersey congressman warned the law would cause a population exodus out of the Northeast and possibly a second recession. A Manhattan congresswoman warned it would force dramatic cuts in local budgets for police officers and firefighters.
These were some of the dire warnings Democratic lawmakers issued about the 2017 Republican tax law signed by President Trump, which liberals said would hurt primarily Democratic-voting states by limiting what taxpayers could deduct in state and local taxes (SALT) from their federal tax returns.
But more than a year after Trump’s tax cut was implemented, the harm inflicted by the tax law on Democratic states appears — at least thus far — less significant than Democrats had warned, according to interviews with a half-dozen economists from across the political spectrum.
The law has raised taxes on some predominantly high-income residents of some blue states, but there’s not much evidence that it is doing large-scale damage to the states as a whole.
“A lot of these claims were knee-jerk, political reactions,” said Carl Davis, a tax analyst for the Institute on Taxation and Economic Policy, a left-leaning think tank. “Some perspective is needed on some of the wild claims about how it would damage blue states’ economies.”
Experts and officials who issued the warnings over the new SALT cap say Trump’s tax law is still relatively new, noting it could take years to see its provision change the behavior of taxpayers, and they highlight estimates showing the law was in part paid for by having the federal government take billions in additional revenue out of states such as New York.
Still, at least so far, rich people have not en masse fled high tax blue states due to the tax law’s new restrictions, with nonpartisan analysts at Moody’s earlier this month finding “migration from high-tax states is lower than a decade ago,” noting there’s little evidence the tax law is forcing residents to leave states such as New York and California.
The new law has had some effect on the real estate market, but it has not been as dramatic as congressional had Democrats warned. A report by the New York Federal Reserve found the law may have contributed to a partial slowdown of home sales nationwide in 2018, but there have been no enormous decreases in home values.
Most of those who did see a tax increase were in the upper echelon of earners.
Residents of red states will see a slightly larger increase in what they will be able to spend over the course of their lifetimes due to the new law, but the difference is not huge. The law increased projected lifetime spending by 1.6 percent for those in Republican-leaning states, compared to 1.3 percent for residents in Democratic-leaning states, according to the National Bureau of Economic Research study. The difference is larger among the rich in those states.
Among those who did see a tax increase, the majority were in the upper echelon of earners. Congressional Democrats have introduced several proposals to repeal the new cap on state and local deductions. About 96 percent of the benefits for doing so would go to the top 20 percent of taxpayers, according to the Tax Policy Center. Other analyses have found similar distributional impacts of the cap.
The impact on wealthy taxpayers may be causing some pain for state budgets, as Democrats warned. A handful of Democratic-controlled states saw a decline in state tax revenue, with personal income tax collections falling more than 5 percent below forecast in New York and California this year, according to research by Lucy Dadayan, a senior research associate at the Tax Policy Center.
But it is impossible to know to what extent the cap exacerbated that trend; the stock market and government shutdown are likely to have injected significant economic volatility into both states’ economies.
Kyle Pomerleau, the chief economist at the right-leaning Tax Foundation, said it is difficult to see how the new cap would cut state revenue. The new cap may make it more difficult for states to raise taxes on wealthier people in the future, Pomerleau said, but that impact would not have changed this year’s numbers.
“It’s really more of a long-term, indirect effect,” Pomerleau said. “It’s unlikely to be having an effect right now on state revenues.”
The Republican tax law signed by Trump dramatically slashed corporate and individual tax rates, adding more than $1.5 trillion to the projected federal deficit. The plan delivers substantially larger benefits to wealthier Americans, several nonpartisan think-tanks have found, and has fallen short of delivering the boost to wages and economic growth promised by its boosters.
It also dramatically weakened the estate tax paid by a fraction of only the wealthiest families, allowing couples filing jointly to pass on $22.4 million tax-free.
Rep. Joshua S. Gottheimer (D-N.J.), a member of the bipartisan “Problem Solvers” caucus, said the new SALT cap would “ruin our property values and likely send people, jobs, and businesses fleeing from the state … I believe it could trigger another recession here in the northeast and, ultimately, across the United States.”
Rep. Carolyn Maloney (D-N.Y.) warned the “declaration of war on New Yorkers” included “massive tax hikes” that would force cuts to police, firefighter, and education budgets. On Tuesday, Maloney said in a statement that it’s “way too soon to see all the negative effects of the Trump administration’s tax cuts, but we do know that the SALT deductions cap was a deliberate attempt by the GOP to force states like New York and its municipalities to cut spending.”
Gov. Andrew M. Cuomo (D-N.Y.) called reducing the cap “an all-out, direct attack on New York State’s economic future. . . . It is crass. It is ugly. It is divisive. It is partisan legislating. It is an economic civil war. Make no mistake: They are aiming to hurt us.”
In a statement Tuesday, New York State Budget Director Robert Mujica said the provision is hurting the state and others like it.
“The cap on SALT deductibility will increase taxes by more than $600 billion, overwhelmingly impacting New York and similarly situated states that’s made only more egregious by the fact that New York is already the number one ‘donor state’ in the nation — contributing $36 billion more to the federal government than we get back every year. The SALT cap makes this imbalance worse, raising taxes on New Yorkers by $15 billion annually — all so that large corporations and other states can reap the rewards.”
Gottheimer also said he heard “nonstop” from constituents about how their property values decreased, and noted New Jersey did see more people leave than any other state.
“That’s not a coincidence,” Gottheimer said in a statement. “Call me again next year when the Tax Hike Bill really settles in.”
Joseph Bankman, a Stanford University law professor who has been critical of the cap, acknowledged there appears to have been little short-term exodus from high tax states but said the provision could have large consequences in the long-run. He said that although there has been no exodus from high-tax states, more people may have migrated to places like California and New York were it not for the cap.
“States’ long-term problem could be that more people don’t come,” Bankman said. “Although we really don’t know if that has happened yet.”
Democratic critics of the cap got an unlikely boost this week from President Trump, who implied on Twitter that the measure was contributing to people “fleeing New York State because of high taxes and yes, even oppression of sorts.” Economists have disputed Trump’s critique of his tax law.