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Could U.S. Tax Reform Spark a Wave of Tax Refugees?

Could U.S. Tax Reform Spark a Wave of Tax Refugees?

Tax reform is one of the signature items that Donald Trump’s administration has been trying to implement. Over the past year, Republicans have tried (without much success) to introduce a new bill that would implement some of the most significant tax reductions since the Ronald Reagan administration, notably to the corporate tax rate. In order to offset these reductions, the state and local tax deduction (SALT) is an important tax break that is now being targeted for removal by the Republican Party. High earner residents of rich states, New York and California in particular, would be hit hardest.

But if a compromise is not reached and an all-out repeal is introduced, a tax refugee migration could very well start to unfold.

Analysts now speculate that the reforms could create the occurrence of ‘tax refugees’ from high income tax states in which the SALT deduction is most commonly claimed. States in which there is little to no state income tax, for example Florida, could be the biggest recipients of this influx.

So what is SALT? Under current US tax law, wealthier individuals who choose to itemise (deducting eligible expenses on their federal tax returns) are able to claim a reduction on their state and local income taxes. For individuals who pay a lot of taxes, pay a high mortgage interest/s or donate large amounts to charity – SALT deductions work in their favour.

By eliminating this loophole, high earners (the highest concentration of whom are in the $50,000 to $100,000 earning range) will effectively face a tax hike as they can no longer decrease the amount of tax that would have to pay. Taxpayers with incomes over $100,000 would pay around 90 percent of the tax increase if the deduction was terminated.

The size of SALT claims varies state to state. In California’s 18th congressional district on the San Francisco Bay, home to many of Silicon Valley’s tech-pioneers, the average claim in 2015 was $26,668. In New York’s 12th district on Manhattan’s east side, home to the penthouses of Wall Street’s elite, it was $31,078 – the highest of America’s 435 districts.

As of 2017, the New York and California rates of SALT which are applied to gross income stand at 9.1% and 7.9%. For states that don’t have state income taxes, who rely more on sales and property taxes, Florida and Texas, the average stands at 2.6% and 2.5%. Some argue that Trump’s tax bill would essentially reward states that voted predominantly Republican and punish those who voted Democrat.

There is now talk that Miami real estate would benefit from this proposed bill. Goldman Sachs, a renowned investment bank, estimates that New York City could see as much as 4% of its top earners vacate the city, presumably south. Leafy high-tax states with upper-middle class populations such as Connecticut, New Jersey and Virginia will also experience hikes. As Bloomberg News’s Jason Kelly reported, fund managers are now concerned of a possible ‘tax refugee exodus’ from the East Coast.

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So where do these refugees seek refuge? Despite rising sea level and hurricane concerns, Miami is considered one of the favoured destinations. With no state income tax and business-friendly revenue codes as well as an idealistic lifestyle, it will likely lure the rich. It has been reported that realtor and development authorities will be throwing lavish parties in the coming months in a prospective North-easterner client drive.

Overall, this will impact state budgets. SALT states’ tax revenues would see a fall, especially in areas where high earners provide the biggest source of income tax receipts.

The risk to state budgets and the potential trend for relocation is demonstrated by the fund manager David Tepper. According to the Institutional Investor’s Alpha, the world’s fourth highest earning hedge fund manager earned more than $6 billion from 2012 to 2015.  Experts say his move (not to mention his headquarters’ move) to Miami Beach in 2016 (before SALT amendments were even proposed) will cost New Jersey hundreds of millions of dollars in tax revenue.

Budgetary exposure is a recurrent theme. In 2013, state income tax generated by residents of seven of the wealthiest towns in Fairfield County, Connecticut amounted to $2.18 billion, according to the newspaper Hartford Courant. This is close to 10 percent of the state budget.

In recent days, despite regular mixed messages from the White House, it has been stated that President Trump is open to the ‘tweaking’ of a final tax bill. Setting specific caps on the level of current deductions rather than repealing SALT altogether, have been discussed by various Republicans. Ideas as such will solely depend on how voting proceeds in the House of Representatives and Senate in the coming weeks. National Economic Council Director Gary Cohn stated in a television interview that ‘we [the administration] are very concerned’ about SALT state members in the House.

But if a compromise is not reached and an all-out repeal is introduced, a tax refugee migration could very well start to unfold. In discussing if SALT terminating legislation is passed by the House, New York State’s Governor Andrew Cuomo tweeted ‘New York will be destroyed.’

Real estate and luxury yacht agents from the Miami-Palm Beach area will be watching this development closely.

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