Republican Tax Reform May Accelerate Exodus Out of California

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The following is a summary of our recent our Lifetime Income podcast, which can be accessed on our site here or on iTunes here.

Federal Tax Reform May Be Bad News for Your Deductions

Both Republican tax plans may have serious impacts on residents in high-income states with places like California, Massachusetts, and New York impacted the most.

“It’s not just that they’re going after itemized deductions in both the Trump plan and the Republican plan,” said Jim Puplava on Financial Sense Newshour. “In both plans, they’re also looking at reducing contributions to pension plans, even though Congress critters get the most lavish pension plans and medical plans in the country.”

Ostensibly, when lawmakers seek to eliminate itemized deductions, they propose lower tax rates to compensate. But we’ve been through this before, Puplava noted, for example during the Regan tax reform era.

At that time, many deductions were eliminated, and tax rates were supposed to go from 50 to 28 percent. Though deductions and tax shelters went away in the first year, it took 3 years to phase in the new tax rates. The following year, with 1 year at 28 percent rates, George H. Bush raised the rate to 31 percent. Bill Clinton further raised tax rates to 39.6 and phased out part of itemized deductions.

Planning an Escape

For those living in high-income-tax states, it may make sense to pull up stakes or to consider other forms of asset protection. The Mises Institute just released a study on the phenomenon of tax exodus, and it found that 7.5 million people have left high-tax states, Puplava noted.

The top destinations were Florida, Texas, and North Carolina. With the push to eliminate state and property taxes as deductions at the Federal level, many may have little choice but to leave.

“If you pay $100,000 in taxes and you’re in a 39.6 percent federal tax bracket, you save $40,000 on your federal tax return,” Puplava noted.

If either the Republican or Trump version of tax reform goes through, deductions are being eliminated to some degree. Couple this with the fact that heavily populated high-tax states are hungry for revenue, and those close to retirement may be hit hard.

“California is already the most expensive state to live in because of the cost of housing here,” Puplava said. “I predict in the next decade, we’ll probably see California file for bankruptcy, because we are losing companies.”

Nestlé closed down its second and final factory in Los Angeles because of taxes and regulations, and other employers are leaving the state in droves.

The reality is, we may be looking at mass migration out of high-tax areas to states with lower taxes and cost of living, Puplava noted. He’s encouraging many clients to consider the option as they near retirement.

“It’s one of the key things we’re using in retirement planning,” he said. “Because let’s face it: you can’t earn the rate of returns on safe investments today that you once did 15 or 20 years ago.” 

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