Sure, the Senate bill passed December 2nd contains lots of breaks for the wealthy. A new break for millionaire business owners is introduced; the estate tax exemption is doubled; and the cuts awarded to corporations will flow through mostly to wealthy stockholders. Plus, low capital gain rates are preserved; even the break for carried interest is preserved. Business owners, real estate magnates, hedge fund managers, venture capitalists, and billionaire entrepreneurs all make out like bandits.
But there’s one little problem. It involves million dollar pay received as salary or a bonus, the kind of money received by executives, by Wall Street traders and salespeople, by high level staff in Silicon Valley and Hollywood, by mega-lawyers, lobbyists, and consultants. Million dollar W-2 income, for short.
If they live in the wrong state, then salary-and-bonus millionaires take it on the chin. It’s the SALT deduction, stupid.
- The Senate bill cuts the top rate, paid on ordinary income of $1,000,000 or more, to 38.6% from 39.6%. You will pay $10,000 less in tax for each million dollars earned beyond the first.
- The Senate also lowers rates below the top bracket; on the first million dollars, you’ll now pay $301,000 in Federal tax, versus the $340,000 you would have paid under the old rates. In short, on the first million dollars of salary, you save about $39,000 under the Senate bill; and then you save $10,000 on each additional one million dollars earned. What’s not to like, eh?
- But wait: a Californian millionaire will pay about 10% of that first million dollars to state income tax, and over 12% on each million after that. A New York City resident will pay about the same in state and local income taxes; a Connecticut, Illinois, Massachusetts, or New Jersey tax payer will pay between 5% to 7%, I’ll say 6% for this illustration. A Texas or Florida taxpayer will pay no state income tax.
- Millionaires in any state can be expected to pay about 3% of income as property tax; about $30,000 at $1M, $60,000 at $2M, etc. The new Senate bill limits the property tax deduction.
In sum, there will no longer be a deduction for state and local income tax, plus a $10,000 cap on property taxes. Let’s see what that does to the California or New York salary & bonus millionaire, making exactly $1 million (all numbers rounded for ease of reading).
- He had been deducting $100,000 of state income tax, and $33,000 of property tax. That saved about $52,000 in Federal tax. The loss of those deductions, all except the first $10,000 of property tax, will wipe out tax savings of $48,000. Hence, the $39,000 reduction in taxes due to the lower brackets is more than lost; the Californian making exactly $1,000,000 after other deductions will pay almost $10,000 more under the Senate plan.
- But it gets worse. Let’s say he gets a raise, or cashes in some stock, and earns $2,000,0000 next year. He’ll pay $120,000 of non-deductible state income tax on that incremental income; hence he’ll owe the full $380,600 on that second million. The elimination of SALT hikes his taxes, on each subsequent million dollars, by $46,000 (.385 X lost deductions).
- The New York City resident gets hit about as hard
- By contrast, the Texas or Florida resident gets a tax break of $39,000 on the first million, and $10,000 more on each subsequent million (although under a steady state, much of this $10,000 gain will disappear if property tax scales in proportion to income). The more millions the Texan reports on his W-2, the greater his savings, provided he doesn’t buy too many more ranches.
- Next, let’s look at the New Jersey or Connecticut millionaire. They had been deducting $60,000 in income tax and $33,000 in property tax from the first million dollars; that saved them about $37,000 in tax. So, with no SALT and property tax limited to $10K, they lose most but not all of the benefit of the Senate reductions in lower bracket rates; they’ll still be one or two thousands of dollars ahead under the Senate plan, on taxable income of exactly $1,000,000.
- The picture changes for New Jersey et al. residents who get that same raise to $2,000,000. They’ll pay $60,000 in state income taxes that they can no longer deduct; that will cost them an additional $23,000 in Federal tax, less $10,000 in savings from seeing the top rate drop to 38.6%. So, an additional $13,000 in tax burden, for each subsequent million dollars. Not so bad, compared to New York or California, but still: a tax hike on every million dollars after the first.
Far be it from me to cry for millionaires, wherever they live. My point is political: if you live in the wrong state, Republicans just raised your taxes, no matter how many millions you earn. Read my lips: Republicans raised your taxes.
The hike is large enough that it will show up in an increased withholding allowance in January. Take home pay will drop.
Will any W-2 millionaire on Wall Street ever donate to the Republican party again?