New tax law makes Dallas even stronger draw

For many years, Texas has been attracting corporations and residents from high-tax states, in part because there’s no state income tax and the cost of living remains relatively affordable.

The new tax law will make Texas even more attractive, especially compared with California and New York. Those states, along with Chicago, provide plenty of migrants to Dallas already.

Most of the individual and family savings from tax reform are going to high earners.

In Texas, three-quarters of the upside will be claimed by taxpayers earning over $106,000, according to the Institute on Taxation and Economic Policy, a “nonprofit, nonpartisan” research firm in Washington.

To offset those gains — and the hit on the federal deficit — the law includes a $10,000 cap on deductions for state and local taxes. That feature can punish some residents in high-tax states but has a more muted effect here, even with property taxes rising fast.

The cap on the so-called SALT deduction will affect just 3 percent of Texas taxpayers in 2019, about 386,000 individuals and families, ITEP estimated. That compares with 9 percent of filers nationwide. In New York and California, 16 percent of taxpayers will face the cap — and their hit will be much higher.

The most extreme examples are among the top 1 percent of earners. For them, the cost of capping the SALT deduction will average just under $6,000 a year in Texas. The annual hit on the richest in New York will average almost $107,000, and in California, $87,000, according to data from ITEP.

“It doesn’t apply to everybody, but it matters a lot” to those affected, said Tom Stringer, who lives in Long Island, N.Y. “My world has changed dramatically in the last two months. It’s the same for many of my clients and hundreds of their employees.”

Stringer is managing director of the site selection and incentives practice at BDO in New York. In that role, he helps companies decide where to expand and relocate, and he believes the tax-deduction cap will eventually have a big impact on that process.

“Is it gonna happen tomorrow? No,” Stringer said. “But are the analyses and evaluations happening already? You betcha. And you’ll see the impact on relocations in the next three or four years.”

Scrambling to respond

States whose residents stand to get hit hard by the deduction cap are scrambling to respond. In California, there’s a proposal to count payments over $10,000 as charitable contributions because those donations remain deductible. In New York, the governor is considering an employer-side tax to offset state tax liabilities because employer taxes are fully deductible.

“Both proposals are interesting, but unlikely to succeed for both legal and practical reasons,” wrote Jared Walczak of the Tax Foundation.

With or without such work-arounds, it’s not clear how much the deduction cap will bite, said one expert. Even among the 1 percenters, who are much more likely to face the cap, 9 in 10 people nationwide will be getting a tax cut, according to ITEP.  And their average savings will be $63,000.

“The cap alone may raise their taxes, but there are so many other things in the law that lower their taxes,” said Steve Wamhoff, senior fellow for federal tax policy at ITEP. they’ve just seen their federal taxes go down, are they really going to think about where to move to pay even less?”

Taxes and moving

Wamhoff said there’s not much evidence that people choose to move to simply save on taxes. That expense is one part of a region’s cost of living, and research on millionaires has found that they don’t relocate to low-tax states, in part because they’ve already achieved economic success.

People may appreciate states that don’t have an income tax, and that’s part of the Texas pitch. But calculating the impact of the SALT cap is pretty complicated, Wamhoff said, and his conclusion applies to all income groups: “Taxes are not a significant factor in decisions about where to live.”

A region’s overall cost of living does make a difference in its appeal. With unemployment so low, there’s a corporate war for talent, and companies are looking for any advantage in attracting, developing and keeping workers.

Dallas’ edge on affordability grew slightly as a result of the tax law, according to an index by Runzheimer, a workforce mobility company.

For a family of four that earns $100,000 and owns a home, Atlanta is a few percentage points more expensive than Dallas. Denver is 7 percent higher and Washington 25 percent higher, Runzheimer said.

The tax law also has a major reduction in taxes on passthrough operations, whose income flows through an individual tax filing. Those include many small businesses, and the deduction cap could be a factor for many of those owners, said Cullum Clark, director of the Economics Research Center at Southern Methodist University.

The potential tax savings is one more reason to consider moving here, he said, and those people bring jobs and create new ones.

“Dallas was a bargain before the tax law, and the deal just got better,” Clark said.

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By: MITCHELL SCHNURMAN, Dallas Morning News, February 4, 2018. A link to the original article can be found here.