Residents of Republican-leaning states may be feeling better this tax season.
The controversial limit on state and local tax deductions in the federal tax code overhaul is making for “a small but important difference” for red states than blue state, according to a new study distributed [April 22] by the National Bureau of Economic Research. President Trump’s new tax law reduced the maximum amount you can deduct for state and local taxes to $10,000 or $5,000 if you use married filing separate status.
Households in Republican “red” states are projected to see an average 1.6% increase in remaining lifetime spending in the wake of the Tax Cuts and Jobs Act of 2017, while households in Democratic “blue” states will see an average 1.3% increase.
Without the cap, blue-state consumers would have experienced a 2.1% increase in lifetime spending under the new tax law compared to the 1.9% rise for red state residents, the study said. Case in point: Wyoming, a robust red state with the largest percentage gain in lifetime spending, will rake in an extra $33,679 over their lifetime.
But people living in deeply Democratic California will see the smallest gains and only reap $21,548, according to researchers at the Federal Reserve Bank of Atlanta, Boston University and University of California, Berkeley. “It appears every state on average benefitted from tax reform,” said Boston University economics professor Laurence Kotlikoff, one of the authors.
The blue versus red state trend becomes even more pronounced higher up the earnings ladder. The richest top 10% in red states will see a 2% increase, but the same high-earning blue state residents will have a 1.2% increase, said the findings. The richest residents in Democratic-leaning states didn’t benefit as much.
The $10,000 cap will currently expire in 2025, but Kotlikoff said researchers went with a lifetime spending analysis expecting the limit would stay put. “It’s not trivial, but it’s not enormous,” he said.
It’s another look at tax code with possibly uneven effects. One MarketWatch analysis said states backing President Donald Trump in the 2016 election would reap the majority of money from tax cuts while paying minority share.
Until Trump enacted sweeping 2017 changes to the personal and corporate tax system, there wasn’t a deduction limit for state and local taxes — which happen to be higher in certain Democratic-leaning states. Median state and local taxes were $7,950 in blue states, $5,219 in red states and $6,371 in middle-of-the-road purple states.
The new law, which didn’t earn one Democratic vote in the House or Senate, put a $10,000 limit on state and local tax deductions. Among other things, it also enlarged the standard deduction for taxpayers who thought they’d fare better on that route than itemizing write-offs like state and local tax expenses.
Jared Walczak, senior policy analyst at the Tax Foundation, a conservative-leaning think tank, said the new tax code has been a victory for taxpayers. Before the new laws, people with high state taxes were effectively getting a subsidy from the rest of the country with their unlimited deduction, he said. Walczak said that the latest data has effectively confirmed this.
As far as tax seasons go, it’s been a wild one. There’s been frustration from taxpayers who suddenly owe money and joy from those getting a surprisingly high refund. H&R Block said a large part of the refund let-down could be the fact that many taxpayers didn’t update their tax witholding during 2018. H&R Block tallies said there were fewer tax liabilities across the board for its clients.
The federal government has paid $7.6 billion less in refunds this tax season compared to the last one. When the Internal Revenue Service compared the week ending April 12, 2019 with a comparable point last year, it said filed tax returns were up 0.7% while the number of refunds were down almost 2%. (IRS tallies don’t break out state-by-state refunds.)
Some Democratic states are suing the Treasury Department over the cap on state and local tax deductions (SALT), calling them an “unconstitutional assault.” In February, New Jersey federal lawmakers offered a bill to repeal the cap, while New York Governor Andrew Cuomo has slammed the limits.
The plaintiffs in the ongoing Manhattan Federal Court are New York, New Jersey, Connecticut and Maryland. When the new study ranked lifetime spending within the 50 states and Washington D.C., it put Maryland in 19th place and placed Connecticut in 36th place. New Jersey ranks in 42nd place and New York in 45th place.
In response, federal lawyers argued, “Many taxpayers in these states who previously benefitted most from the [state and local tax] deduction are projected to have consistently lower tax bills due to the combined effect of the act’s many provisions.”
Boy, that Trump is sure a moron, isn’t he, getting a tax cut through Congress that rewards states that voted for him and penalizes states that didn’t vote for him, and/or rewards states with low(er) taxes and penalizes states with high(er) taxes. The irony is that if you believe Republicans have more money than Democrats, that $10,000 SALT limit probably affected a fair number of Wisconsinites who voted for Trump in. (On the other hand, given this state’s seventh-circle-of-tax-hell status under previous governors, the tax cuts, insufficient as they were, signed into law by Gov. Scott Walker may have been the difference between some Wisconsinites’ paying more taxes under the Trump tax cuts and paying less.)
But as Milton Friedman put it …
Congress is responsible for federal taxes, not state and local taxes. Though there is an argument for SALT deductibility on the grounds that one shouldn’t have to pay taxes multiple times, the fact is that SALT was a subsidy to higher-tax states paid for by lower-tax states. The latter group might reasonably ask why they should be penalized for their fiscal responsibility.