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 that a Republican Congress and President Donald Trump enacted in 2017. But those 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.
This week, New York Gov. Andrew Cuomo declared that 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 that have low or no state income taxes, especially Florida.
“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, of course, deeply blue — grumbled as the tax overhaul was being written that it would encourage high-income residents, unable to write off their 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 the New Yorkers who headed south. “This is going to be the tipping point and people will now be making a geographical change.”
After Cuomo complained, the Wall Street Journal reported that Florida is, indeed, seeing a new wave of well-to-do transplants from New York, New Jersey and other high-taxing states, sparking a real estate boom.
So what about California and neighboring Nevada, which, like Florida and Texas, doesn’t have a state income tax? The Wall Street Journal noted that both Nevada and Arizona are seeing their populations grow rapidly.
Former Gov. Jerry Brown sponsored an increase in income taxes on those in higher brackets, generating a windfall of new revenues and helping him balance the state budget. But later, he worried aloud that the federal limit on SALT deductions could entice the rich to flee his state.
There have been anecdotal accounts about such flight, but no one has documented a mass migration. That said, it wouldn’t — as Cuomo pointed out — take much of an exodus from California to have an impact, given that so few high-income residents of his state generate so much of New York’s revenue stream.
The top one percent of New York’s taxpayers supply 46 percent of the state’s income tax revenues. In California, the one-percenters’ share of income taxes is slightly higher, and our top marginal income tax rate, 13.3 percent, is considerably higher than New York’s 8.82 percent.
California Controller Betty Yee tracks state tax receipts and expenditures monthly and reported recently that through December — the first six months of the 2018-19 fiscal year — general revenues were $2.5 billion under budget estimates, including a $1.9 billion income tax shortfall. Preliminary data indicate the monthly shortfall continued in January.
A blip or a trend?
CALmatters is a public interest journalism venture committed to explaining how California’s state Capitol works and why it matters. For more stories by Dan Walters, go to calmatters.org/commentary.