Are rich fleeing over tax law?

California and New York report lower state income receipts in recent months

As taxpayers prepare their first returns affected by the Republican federal tax overhaul, New York’s governor last week put hard numbers behind the harm he says it’s causing his high-tax state: The rich are fleeing and income tax receipts are falling, costing the Empire State more than $14 billion.

California is sharing New York’s pain from what Gov. Andrew Cuomo called the GOP’s “economic civil war” on Democrat-run “blue” states, with the Golden State’s December and January personal income tax receipts down about 24 percent from the same period a year ago.

“It is not a New York-only phenomenon,” Cuomo said in a recent news conference, arguing that the 2017 tax overhaul “encourages high-income New Yorkers to move to other states” such as low-tax Florida and “literally restructured the economy to help red states

“We have been hearing all along from the major accounting firms, to major individuals, that this is going to be the tipping point.” — New York Gov. Andrew Cuomo

at the cost of blue states.”

But in Sacramento, the Democrats who run California aren’t sounding the alarm. Yes, income receipts for the past couple of months are down, they say, but it’s not because the rich are leaving for Las Vegas in low-tax Nevada. They just no longer have an incentive to make earlier state tax payments.

The federal tax law “has removed an incentive that high-income taxpayers had to accelerate payments” to December, said H.D. Palmer, deputy director for external affairs at the California Department of Finance, adding that “most if not all of this decline in DecemberJanuary revenue is expected to be recouped in April.”

What’s behind all this? The 2017 Tax Cuts and Jobs Act, the biggest change in federal tax law since the 1980s, put a $10,000 cap on the income tax deduction

for what tax geeks call SALT — state and local tax payments.

That’s no small thing in states like New York and California, which have some of the nation’s highest income tax rates and where high home values inflate property taxes. Income taxes are the major revenue sources for those states.

The deduction has been at the heart of an ideological war between the major parties. Republicans argue it makes lower-tax states subsidize those with high taxes; Democrats counter that even with the deduction, high-tax states pay more to the federal government than they receive from Uncle Sam.

President Donald Trump, a New Yorker himself, suggested last week that he’d be open to changing the cap on that popular deduction to help residents in hightax states who are seeing a net tax increase, saying that “it’s been severe on them.” But he also quipped that “if New York isn’t going to treat them better, I would recommend they go to another

state where they can get a great job.”

Cuomo’s announcement was prompted by withholding and estimated tax receipts for late December, when officials typically see a rush in payments from filers looking to claim the deduction for the tax year, and January coming in “worse than we had anticipated,” down by half and about $2.3 billion short. Other states, he said, also have felt the pinch: New Jersey was down 35 percent, Connecticut 55 percent, Massachusetts 50 percent and California 24 percent. The total hit to New York from the deduction cap, Cuomo said, is $14.3 billion.

In California, state Controller Betty Yee reported last month that personal income tax receipts for December of $6.76 billion “were $3.45 billion less than expected” in the current budget and down sharply from receipts in December 2017 of $11.50 billion. She noted, however, that the December shortfall “could be partly due to lags in

taxpayer filings at the end of the tax year as a result of federal tax deduction changes” and that “January receipts are expected to catch up” to budget projections. Palmer added that the economy has cooled from a year ago, contributing to the softer figures.

January figures aren’t expected from the controller until today, but estimates last week indicated that totals for December and January still would be down about 24 percent.

But receipts fluctuate throughout the year, and figures from the controller’s office indicate a slight gain overall in personal income tax receipts in 2018 over 2017, up about $4.6 billion, or 5 percent, to $91.8 billion.

Income taxes, of course, are just part of a state’s overall revenue stream — Cuomo noted that for New York, “overall, the state is in very good shape.” And his office acknowledged that Gov. Gavin Newsom’s administration last month projected a record $21.5 billion surplus for California.

“We were not implying that California’s total revenues were down — we’re very familiar with their recent budget numbers and their surplus,” said Morris Peters, a spokesman for Cuomo’s office.

As for whether wealthy filers are fleeing high-tax states, the evidence so far appears to be largely anecdotal.

“We have been hearing all along from the major accounting firms, to major individuals, that this is going to be the tipping point and that people now will be making a decision to make a geographic location change,” Cuomo said last week.

A statistical report from California’s Franchise Tax Board indicates that the number of early returns for adjusted gross incomes of more than $1 million rose from 22,000 in April 2017 to 28,000 in April 2018.

Asked whether New York filers are simply delaying their payments, as California officials contend, Peters said that is “a fundamental

question.” New York’s comptroller, he said, suggested that “we might see something of a return in April.”

Peters also said that because New York is “so highly dependent on our highest income earners” for tax revenues, “we don’t have a luxury to simply hope that’s the case.”

He said California’s situation is different from that of New York and other northeastern snow-belt states whose many wealthy residents have long kept second vacation homes in sunny, low-tax Florida, and where today’s financial servicesoriented economy makes it easy for them to make a move there permanent.

Peters said the New York governor’s office “would defer entirely to our counterparts” in California “on all things related to their numbers.”

“But all similarly situated states,” he said, “have seen a change in taxpayer behavior.”