New York’s latest tax hike, retroactive to the beginning of 2021, boosted the state’s top rate, on income of more than $25 million, to 10.9%, from 8.82%. Add on New York City’s income tax of 3.876%, and super-wealthy residents of the city are paying a top rate of 14.8%—higher than California’s 13.3%.
Even as Tennessee and New Hampshire made moves to eliminate their income tax, Washington is adding one. A 7% capital gains tax will apply to profits of more than $250,000 per year. The law, signed by Governor Jay Inslee in May, goes into effect in January.
The financial impact of these tax hikes are magnified by the $10,000 SALT cap, which is slated to expire in 2026. “You’re essentially getting taxed twice on these dollars because you’re not able to deduct them from your return,” said Matt Masterson, a partner at New Jersey-based advisory firm RegentAtlantic.
Young, of Cornell, estimates the SALT cap effectively widened the average tax gap between states by 36%, the largest difference since at least the early 1980s.
Last month the U.S. House of Representatives approved a bill that would raise the SALT cap to $80,000, allowing the wealthy to deduct at least some of their state tax bills. Senate Democrats have proposed tweaking the bill so that that the richest taxpayers can’t benefit from the higher cap, by permitting an unlimited deduction that phases out above a certain income threshold. Senators disagree on what that threshold should be, with Vermont independent Bernie Sanders favoring $400,000 and New Jersey Democrat Bob Menendez pushing for an income limit just under $1 million.
Even if Congress doesn’t change the rules, some wealthy taxpayers are getting relief from high SALT bills anyway. About 20 states have passed laws that permit a SALT workaround for business owners. With a so-called pass-through entity tax, individual owners can effectively get an unlimited SALT deduction, by getting credit for taxes paid by the businesses they own.
“The more they’re used, the less of a factor that the SALT cap becomes for business owners,” Davis said.
This article was provided by Bloomberg News.