Gov. Andrew Cuomo, D-N.Y., offered Amazon $1.5 billion in corporate cronyism tax breaks, saying, “It’s not a level playing field to begin with. All things being equal, if we do nothing, they’re going to Texas.”
State and local taxes matter. After the historic tax cut passed with President Trump’s signature last December, they matter even more — the tax reform law capped the state and local tax deduction to $10,000 per household for those who itemize, limiting the federal subsidy of high state and local taxes.
As a consequence of tax reform, most taxpayers have seen an increase in their take-home pay. But, for some high-income taxpayers in high-tax states such as New York and California, the savings they realize will be smaller than would have been the case if they lived in a state with a lower tax burden, such as such as Arizona, Florida, or Texas. Some wealthy taxpayers in the highest-taxed states will even see an increase in their tax bill.
Returning to Cuomo’s remarkably candid admission about the enormous tax breaks New York gave to Amazon, it is important to note that for every large company that can lobby for special treatment, there are thousands of small companies which can’t. Firms with fewer than 100 workers employ 57 percent of the workforce. Many of these small businesses aren’t organized as corporations, meaning that the owners pay personal income taxes on any profit they manage to make.
Thus, when the federal tax code limited SALT deductions last December, it had the same practical economic effect as changing the state tax code in all 50 states. We should be able to see such a significant change in state-level employment data, as money and jobs move to states where after-tax income is now higher than before (all other things being equal, as New York’s governor might say).
State-level employment data supports this contention.
Using the average itemized deduction for state and local taxes filed by individual taxpayers in 2014, states can be broken out into three levels of tax burden, high (10 states), medium (21 states), and low (19 states). SALT deductions averaged $15,000 in the high-tax states, $9,710 in the medium-tax states, and $6,889 in the low-tax states.
According to the U.S. Bureau of Labor Statistics in its October jobs report for the states, over the past 10 months since the Trump tax cut, the 19 states with the lowest state and local tax burden have posted 72.1 percent stronger private sector job growth than the 10 states with the highest tax burden and a 50.9 percent stronger pace in adding jobs than the 21 states with an average tax load.
This job growth disparity emerged almost immediately after the tax cut and has remained remarkably constant over 10 months.
Providing added detail, the three states in each tax category with the largest private sector employment showed the following job performance since December 2017:
|Low Tax||Job Growth %|
The three largest low-tax states do not levy a state personal income tax.
Should this job growth disparity continue through the 2020 census, it may result in additional seats in the House of Representatives shifting from New York, Illinois, and perhaps even California to Texas and Florida.
Of course, the governors of high-tax states could always try something different — they could cut taxes and reduce spending to attract jobs. A broad-based state tax reduction would work for everyone, not just Amazon.
Chuck DeVore is Vice President of National Initiatives at the Texas Public Policy Foundation and served in the California State Assembly from 2004 to 2010.