August 27, 2021
August 27, 2021
Ever since the passage of the Trump tax cuts in 2017, a number of lawmakers in mostly “blue”, higher-income states have been attempting to reverse the $10,000 limit on state and local taxes (SALT) that can be deducted on federal income tax returns. Republicans in Congress and the Trump administration knew this cap on SALT deductions would more heavily weigh on “blue states.” It also brought the overall cost of the tax-cut package down to $1.5 trillion, which was required for passage (although the cost was later revised to $1.9 trillion).”
While punishing “blue states” is no way to create tax policy, repealing the cap would primarily benefit the richest Americans. Lawmakers in the most affected states argue that they are in jeopardy of either losing these constituents to lower tax states, or will be hampered in their ability to create more progressive tax structures in their states and localities. Despite evidence to the contrary, these arguments persist.
So, we asked New York state resident Morris Pearl, former Blackrock executive and current chair of the Patriotic Millionaires, a few questions to hear straight from the mouth of a millionaire how the SALT cap and its proposed repeal would affect his life:
The Senate Finance Committee has been instructed to provide relief from the $10,000 cap on state and local tax (SALT) deductions. This will likely mean that a millionaire such as yourself will now be able to deduct significantly more from your federal taxes and enjoy even greater wealth. Does this make you happy?
Not particularly. I don’t need that money and putting a few extra thousand dollars in my pocket isn’t going to make me any happier. I would much rather see more money go towards things like refundable child tax credits, which will actually help people. Policies like that, which lead to a more stable and prosperous society, are going to make me a lot happier in the long run. Contrary to what some of them may think, rich people live in society, and things that make it better (a list which does not include tax cuts for the rich) make our lives better too.
A full repeal of the cap on SALT deductions would cost the federal government an estimated $100 billion in tax year 2022. What are millionaires like you likely to do with that $100 billion and how does that help America meet the challenges we are facing right now?
Honestly, millionaires are not going to do a whole lot with that money. I’m sure some will find a way to spend it, but most already have more money than they’re ever going to need or want to spend in the first place. Saving a few thousand dollars doesn’t change our quality of life at all. For me, if my tax bill goes down by twenty thousand dollars, all that means is that I’ll be withdrawing twenty thousand fewer dollars from my brokerage account next year.
In theory, my kids might have a bigger inheritance in (I hope) many years if I take less money out of that account, but I don’t think that will really help anyone meet any challenges. I already have enough money that whatever challenges my kids are going to face aren’t financial, and them having slightly more money in however many years is certainly not going to help our country as a whole rebound from the COVID pandemic.
One of the arguments that is sometimes made for repealing the cap on SALT deductions is that it allows states to be more aggressive in passing progressive tax legislation without pushing their richest residents to move to a state with lower taxes. What do you make of this argument? Has this been true of your experience?
People who decide where to move based on taxes do not live in New York now. Their grandparents moved away when Herbert Lehman raised their taxes in the 1930s, or they moved away in any of the dozens of years in recent history when New York has had a higher tax rate than Florida. It’s seriously a ridiculous argument. Do people really think that someone living in New York who might move will change his or her mind based on the deductibility of SALT?
All the data says that tax changes don’t actually cause rich people to move in any statistically significant way. This makes sense if you really think about it, because if anything, rich people are LESS likely to move based on things like tax rates than people who work for a living. We already have so much money that a few percentage points of difference in our incomes makes absolutely no difference in our quality of life.
Whenever you think about moving to a different state, what are the factors that weigh on your decision and where do state and local taxes fit into your calculations?
I was walking on the beach near the Santa Monica Pier yesterday, and I thought that maybe it would be nice to have a house on the Pacific Ocean. Maybe I could get a second home and split my time between the beach and NYC? But I’m not going to do that. My wife’s parents had two homes when she was growing up, and she talks about the constant angst over forgetting something in one and wanting it in the other. I can barely deal with not running out of toothpaste in my co-op in Manhattan where I live. I could not imagine having two homes.
So, I’m not looking to move to the beach anytime soon, but if I were, state and local taxes would be at the absolute bottom of the list of things I would care about. I, like most other millionaires (and most other human beings, for that matter), have a whole host of other things that matter more in my decision of where to live than tax rates. Proximity to family, friends, professional connections, amenities like nice restaurants and parks, etc, all come first.
One of the things my late father-in-law taught me was that the purpose of having money is to not have to think about money. The point of being a millionaire is being able to choose where you want to live based on things that will make your life better, not just wherever is cheapest.
There are millionaires that do flee to so-called “low-tax states” to avoid state and local taxes. Elon Musk might be the most notable example making news last year announcing his departure from California to Texas. How do you respond to those who point to these examples as evidence that taxing the rich does drive rich people out of higher-tax states?
I doubt that taxes were the only reason that Mr. Musk decided to move to Texas. He may have wanted to make a very public point about taxation when announcing his move, but I find it hard to believe he had no other reasons to make that move.
Anything else we should have asked, but didn’t?
I could be supportive of making some changes, like raising the cap above ten thousand dollars. I think that everyone currently being affected by the cap can probably afford to pay, but the real problem with our tax code isn’t the people making a few hundred thousand dollars a year paying a few percentage points below what they should – it’s millionaires and billionaires paying almost nothing. So, there’s some flexibility here, but if a compromise on this issue has to happen, it needs to make sure those ultra-wealthy folks are still paying their fair share.