Discussions about eliminating the state and local income tax deduction as part of President Trump’s agenda for a new tax act have taxpayers in New York, New Jersey, Connecticut, and California up in arms because they would lose a very significant itemized tax deduction if this provision was enacted by Congress resulting in an increased tax burden.
Some would argue that perhaps it is time for these states to revise their budgets to limit spending so that the tax burden of their residents can be reduced. State legislators who have resorted to “taxing the rich” often find themselves in a quagmire. Let’s look at some examples.
Voters in Maine approved a ballot measure that increased by 3 percentage points the income tax rate for those earning more than $200,000. This set Maine’s top income tax rate at 10.15 percent, second-highest in the country. The tax increase, promoted by teachers unions, was a classic “soak the rich” proposal. The 41 percent rate increase was expected to impact only around 7,000 filers in Maine, and was expected to generate $157 million per year, which would be earmarked for schools.
The Maine Revenue Services reported that income tax collections for the year were largely unchanged, despite the dramatic rate increase. Promoters of the tax increase argued the tax increase was working, predicting increased collections in future years. Apparently, state lawmakers from both parties didn’t buy that argument. While a budget faceoff led to a short government shutdown in Maine, the conclusion of that standoff ended with a budget agreement. The agreement eliminated the 3-percentage-point “surcharge” and provided increased school funding through other means.
Republicans hold the governorship and the Maine Senate, while Democrats control the House. The margin of control in both chambers is narrow. Yet the budget agreement passed the Maine House 147-2 and the Senate by 35-0. This means both Democrats and Republicans tacitly recognized that “taxing the rich” is more effective as a slogan than in practice.
Lawmakers in Connecticut are learning the same lesson. There, officials have raised taxes at least five times since 2011, and the state’s top income tax rate has been hiked from 5 percent in 2008 to 6.99 percent today. Yet Connecticut’s income tax collections are declining, and the state is struggling with large budget shortfalls. General Electric, due to the increasing taxes, moved its corporate headquarters out of Connecticut to Boston.
In Illinois, lawmakers approved a 67 percent income tax rate increase in 2011 and raised corporate income tax rates 46 percent. They then spent much of the next few years approving offsetting tax breaks for specific companies to keep them from leaving the state. Two companies alone — Navistar International Corp. and Sears Holdings Corp. — received nearly $500 million in tax breaks to keep them in Illinois.
The New York Post reported that NJ, NY and CT landed in the top five places people were moving out of the fastest per United Van Lines, citing insanely high cost of living (includes taxes), the winter weather, and employers seeking lower taxing states. Back in the late 1980, JC Penny and Exxon relocated its corporate headquarters from NYC to Dallas to reduce the personal income taxes paid by its executives.
For some reason, politicians have failed to learn that capital responds to incentives. If a state signals that investment isn’t welcome (e.g., by increasing taxes), then that investment will quickly shift to other states. CA has seen a tremendous exodus of businesses leaving for TX.
If you would like to discuss your business or personal tax planning, tax preparation and other financial concerns with an experienced tax professional, we invite you to call 610-594-2601 today to make an appointment at our Exton PA CPA office to discuss your situation. You can also schedule a consultation at Click Here.
