Most Americans sat down after the Trump tax law took effect and calculated the immediate impact on their own personal tax situation. That’s natural; I did the same thing. But there’s a much bigger picture here.
The tax bill not only affects your individual liability but also affects asset prices, capital allocation, capital expenditures and regional differences. One of the most important consequences of this new tax law is to accentuate differences in economic development among different states.
The new law eliminates most deductions for state and local taxes for federal tax purposes. For example, if you live in Connecticut and pay 7% state income tax, the real cost prior to 2018 was only 4.2% because you could recover 2.8% on your federal tax return in the form of a tax deduction. Under the new law, 7% means 7% because there’s no deduction. That’s an effective 66.7% increase in your state income tax liability from 4.2% to 7%.
The situation is just as bad or worse in New York, New Jersey, California and a few other states. This will trigger a mass migration of the richest, best-educated and most entrepreneurial talent from the high-tax states to low-tax states such as Texas and Florida. As this article describes, this talent migration will also shift the center of gravity in major businesses such as technology, entertainment and finance.
It’s hard to call this an “unintended consequence” because this outcome was very much intended by the sponsors of the law. But it will mark a profound turning point in the development of popular culture nonetheless.