Congress passed the most sweeping tax reform since 1986 on Wednesday, and with any luck that success for the country will trigger a new reform debate in many states. To wit, how much will they have to cut income-tax rates to retain and attract the high-income earners who finance so much of their state budgets?
You can figure out who most needs reform by the decibels of protest. Amid other apocalyptic warnings, New York Gov. Andrew Cuomo last weekend declared that the GOP bill’s limit on the state-and-local tax deduction will trigger “an economic civil war” between high- and low-tax states. California Governor Jerry Brown has likened Republicans to “mafia thugs” while Mr. Cuomo calls the bill a “dagger at the economic heart of New York.” By heart, he apparently means the state’s top earners who pay for Albany’s ever-higher spending.
The truth is that few taxpayers even in high tax states will be hurt because they won’t need a deduction beyond the $10,000 state-and-local cap in the bill. Tax writers estimate that only about 5% of households will even itemize their deductions because the bill nearly doubles the standard deduction to $24,000. Most affluent households who do itemize will also be held harmless because of tax-rate reductions.
But the tax math will be tricky for many high-earners in states with the highest tax rates. The bill reduces the top federal tax rate to 37% from 39.6% and increases the threshold at which it kicks in to $600,000 from $470,000 for couples filing jointly. Our friend Don Luskin did the math and says that high earners in states with top rates exceeding 6.56% could see their tax bills increase.