September 08, 2020
Richard Reeves and
While that is true, the point is that ending the deduction means that rich people in blue states now face much higher tax rates. This gives them more incentive to not live in blue states. To get an idea of the money involved, California has a top tax bracket of 13.0 percent. If someone had an income of $2.2 million a year, they would be paying around $200,000 a year in state taxes. (The top rate applies on income above $1.2 million.) The loss of the deduction would mean that their federal tax bill is now $74,000 a year higher than it had been previously. (They would be in the 37 percent bracket.)
The research on tax-induced mobility is mixed, but that is in part because it would be a hard effect to measure. There are plenty of reasons that people would want to live in a place like California or New York, rather than Arkansas, even if the tax rate is much higher. The issue is, given the benefits of living in California or New York relative to Arkansas, how many people would move if they now had to pay a considerably higher tax rate.
And, keep in mind, no one thinks this happens all at once. New York doesn’t raise its taxes in May and all the rich people move to Florida in June. This would be a process that takes place over time, leaving fewer rich people to tax in New York.
If you are inclined to trivialize this impact, think about differences in housing costs. An additional tax payment of $74,000 a year would be roughly equivalent to a 4 percent mortgage on a home selling for $1,850,000. If a rich person were looking at two roughly identical homes and one cost $1,850,000 more than the other, do we think they would be more likely to choose the cheaper one?
Being an old-fashioned economist, I am inclined to think they would opt for the cheaper one. And, since I don’t think that taxes are a unique cost that rich people for some reason don’t care about, it seems very plausible to me that the higher effective tax rate without the federal deduction will cause more rich people to move out of state, meaning they will have less money to pay for education, infrastructure, and social services.
On this last point, Reeves and Pulliam add a line that belongs on the Comedy Channel, not a NYT column:
“But if the goal is for the federal government to provide additional support to state and local governments, far better to do so directly, rather than by the roundabout route of offering a tax break to the rich.”
I suppose that it is hard to learn about what is going on in Congress at the Brookings Institution, but everyone outside of this esteemed center of learning knows that ain’t going to happen.