It’s looking increasingly likely that we’ll see the GOP tax bill pass in the near future. Prepped for signing by the end of this year, the bill is sure to have sweeping effects on all taxpayers, especially those in high tax states.
“(Eliminating the state and local tax deduction) could help on the margins to drive people from those states to lower tax states because their burdens are going to increase significantly,” White said.
“What’s more, it’s going to make it more difficult during the next recession for states to increase taxes without being burdensome to the underlying economy.”
Many of the Rich Will Pay Under New Tax Plan
If we take the example of a high-net-worth individual living in California and making $1 million a year, that person’s state taxes amount to $102,000. If that person owns a $1.5 million home, property taxes would be around $27,000. As the new plan eliminates mortgage interest deduction above $500,000, this person would lose the ability to deduct roughly $20,000 in interest expenses.
In total, this person would lose roughly $150,000 in deductions. At a 40 percent tax rate, this person would end up paying around $60,000 more in taxes under the GOP plan.
“The idea that this is a tax giveaway to the rich just doesn’t hold true,” Financial Sense’s Jim Puplava said.
“It may help somebody that lives in Florida, who doesn’t have to worry about state tax deductions, because there’s no state income tax. And it does help out corporations by lowering their tax rate… but as far as individuals who lose their itemized deductions, this is going to, in effect, be a tax increase.”
Millionaire Migration Patterns
Generally, high-net-worth individuals don’t tend to move state-to-state very often, but that’s probably about to change.
One notable example occurred last year when billionaire hedge fund manager David Tepper relocated from high income tax New Jersey to Florida, which doesn’t have a state income tax. This not only saved Tepper millions of dollars, but also cost New Jersey as well.
If the GOP plan goes through, high tax states may have to rethink their tax strategy.
“I think we’re going to see a big migration,” Jim Puplava told listeners this week.
“We’re already losing almost 100,000 taxpayers per year in California. … If this tax bill goes through, this is really going to force a lot of people out. This is going to have a major impact on those high-tax states, and this is going to be a revenue drain.”
Ramifications Down the Road
With the deductibility of state and property taxes under threat, where every dollar paid saves 40 cents in federal taxes, we could see the effective tax rate spike.
Also, historically, when the federal government has eliminated deductions in exchange for lower tax rates, it has a habit of hiking those rates back up in short order. This happened in 1986 under Ronald Reagan’s tax reform where we saw President Bush Sr. and President Clinton hike rates up to the current 39.6 percent rate on the high end.
“This is a major game changer,” Puplava said.
“Now that it looks like we have a greater likelihood of this tax bill getting passed, we’re going to see a demographic migration.”
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This post originally appeared on Zero Hedge