SALT Cap Confounds Doomsayers as Fears of Exodus Prove Overblown

Contrary to the dire predictions at the time, the massive overhaul of the nation’s tax code during Donald Trump’s presidency had a negligible initial impact on the nation’s domestic migration patterns, new data from the Internal Revenue Service show.

The Tax Cuts and Jobs Act of 2017 capped the deduction on state-and-local taxes at $10,000, further increasing -- at least for top earners -- the overall tax savings of states such as Florida and Texas over New York or California. The change prompted concerns that there would be a wealth exodus from traditional finance and technology hubs and an accompanying windfall for the nine states without a wage tax, which include the Sunshine and Lone Star states.

The data is finally in, and it didn’t happen. In the first year after the cap was put in place, zero-wage-tax states netted about $1.24 in new earnings from migrants for every $100 already earned there -- slightly less than the net migration rates in the previous three years. Florida, the top destination among zero-tax states, netted $2.65, also a drop from the previous years’ rates.

The trend remains broadly positive, but there was no SALT-cap bump.

SALT Cap Confounds Doomsayers as Fears of Exodus Prove Overblown

The net migration rate remained negative in high-tax states including New York, New Jersey and California. But as with the states at the opposite end of the tax spectrum, there was no observable shift in trend. In fact, New York’s negative net migration rate got slightly less negative.

SALT Cap Confounds Doomsayers as Fears of Exodus Prove Overblown

Two and a half years after the changes, the so-called SALT deduction remains a hotly debated issue in Washington. Lawmakers from high-tax states want the cap nixed or pushed higher and are angling to win such a tweak as part of any package of forthcoming tax hikes.

The new data -- tax returns received by the IRS through 2019, mostly reflecting earnings year 2018 -- present the clearest picture to date of migration patterns immediately after the law was implemented. The data show not just the number of people that moved but the size of their annual earnings. The statistics reinforce existing research that shows high-earning Americans are relatively resistant to leaving the markets where they first became successful.

Of course, moving is a lengthy endeavor for many, and it’s still unclear what happened in subsequent years. The pandemic’s work-from-home revolution could yet provide further impetus for some high-earners to move.

©2021 Bloomberg L.P.

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