Menu
Cart 0

Wall Street Journal article on people moving because of Trump tax cuts not well reasoned

Posted by John T. Reed on

I love the Wall Street Journal, but they occasionally write about stuff where I am an expert, and reveal that they are too reliant on twenty-something Ivy League grads with no subject matter knowledge in any subject. They just find some supposed experts whom they quote. 
.
But their lack of knowledge and understanding of the subject prevents them from getting the story right. The less you know about the subject, the harder you need to work to get the story right. And I see no evidence of such work.
.
Case in point: Today’s page M6 article “Tax laws have buyers on the move.” Google the title to read it. If I give you a link, they will try to sell you a subscription.
.
It is about the notion that the Trump tax cuts made it less attractive to live in states with high sales taxes or income taxes. All the law did was raise your after-tax rate on your federal income tax return if you can no longer deduct some sales and state income taxes because of the $10,000 limit on property tax deductions and the new $24,000 standard deduction.
.
It happens that I wrote a series of articles about this issue before and after the Trump tax cuts. The actual raw tax rates in the 50 states and DC on income, sales, estates, gifts, inheritance are generally more important than how much of some of them you can deduct on your federal return.
.
First, sales taxes are trivial. Yes, there is a big difference percentage between the highest sales tax state—LA 10% and the lowest—DE, MT, NH, OR—0%. But you have to look at the raw numbers. In the highest sales taxed states, the residents pay something like $3,000 a year in sales tax. Are you going to move to a different state to avoid that? 
.
Plus the sales tax itemized deduction is “either or” with state income taxes. Unless you buy a car or live in a state with no state income taxes, you would almost always choose to deduct state income taxes, not sales taxes.
.
The WSJ article says “a state with low income taxes may make up with it with high sales taxes.” Annual income is a much bigger number than purchases subject to sales tax so it is unlikely that any state makes up for a low income tax rate with high sales tax rate. 
.
It also says that Florida’s income tax rate of zero may not be a bargain because the homeowners insurance there may cost so much more than in a state with an income tax that you would be better off in the state with income tax.
.
In fact, the highest median homeowners insurance policy is in DC and is about $1,800. If you have no sense of proportion about sales taxes, state income taxes, and homeowners insurance policy costs, you might think that there is a state with such high insurance costs and no state income tax, that you should stay way from the state with no income tax. Pray tell, what state is that? I don’t think there is any state that beats a zero income tax state because of its cheaper homeowners insurance.
.
The article also suggests looking at overall housing costs, not just at state income and sales tax rates. That advice would have everyone move to places like Oklahoma, Harlingen, TX, or Kansas. Since the super high income folks are about the only people who should move for cheaper state tax rates, don’t look for a lot of them to seek the cheapest housing costs.
.
Also, the article focuses on the sales and state income taxes. There are other, often more important taxes, namely estate taxes, inheritance taxes, gift taxes.
.
You also have to look at your situation. Some people like the rich and the retired have relatively little income so income tax rates are sort of irrelevant. If you have an estate that you want to preserve, FL is good; MA is not. My wife just inherited money from each. No tax in FL; big tax in MA. Ditto income taxes in those two states.
.
There are also laws other than tax laws that matter. The following states give an unlimited dollar homestead exemption for bankruptcies (the limits in those states are by acreage). If you go bankrupt, and no one plans to do that, you get to keep all your home equity in AR, DC, FL, IA KS, OK, SD, TX. If you go bankrupt, that would likely be far more important than tax rates in the various states. 
.
Picking where you live based on tax laws really does not make much sense unless you are extremely highly paid like a pro athlete or Rush Limbaugh or a movie/TV star or an investment banker, it is hard to conclude your after-tax income tax rate determines where you live. And sales tax, as I said, is a $3,000-a-year item in the highest sales tax state—absent a big-ticket purchase like an expensive vehicle.

Share this post



← Older Post Newer Post →


Leave a comment

Please note, comments must be approved before they are published.