Report Detail Summary

The SALT effects

November 12, 2018

On December 22, 2017, President Trump signed the Tax Cuts and Jobs Act. It cuts the corporate tax rate from 35 percent to 21 percent beginning in 2018. The top individual tax rate drops to 37 percent. It cuts income tax rates, doubles the standard deduction, and eliminates personal exemptions. The corporate cuts are permanent, while the individual changes expire at the end of 2025. The state and taxpayers’ complaints about the SALT limitations is misguided. The calculations presented here show that in general most people will experience an increase in their take home pay of approximately 2%. While there is a bracket creep effect, that is the people in the higher bracket will experience a larger percentage increase in their take home pay, the effect is directly attributable to the progressivity of the tax code. Our calculations also show that the Trump tax cuts does not alter the relative attractiveness of the different states. The increase in take home appears to be similar across states. Again, the progressivity of the combined state and federal tax codes induces a bracket creep type of effect. The higher the income of the household, the greater percentage increase in after-tax income resulting from moving to the lower tax state. One way to think of this effect is that as income rises, the taxpayers are pushed into a higher federal bracket in all states. For the states with progressive taxes, the combined effect of the bracket creep is even more pronounced. Hence the tax take increases even faster for the states with progressive tax codes. That in turn increases the benefits of migration for the higher income households.

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