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The Tax Cuts and Jobs Act will cut individual income taxes for about two-thirds of US households in 2018, by an average of about $1,300. But how will households in different states fare? In a new report the Tax Policy Center compares the effects of the TCJA on individual income taxes across states.
We found that between 60 percent and 76 percent of taxpayers in every state will benefit from the TCJA’s individual income tax provisions in 2018. In most, the average change in after-tax income will be close to the 1.8 percent national average. Taxpayers in Alaska, Louisiana, North Dakota, South Dakota, Texas, Washington, and Wyoming will have the largest average increases in after-tax income, each exceeding 2.1 percent. Taxpayers in California, New York, and Oregon will have the smallest average increases in after tax-income, with each below 1.5 percent.
However, there is a large variation in the individual income tax outcomes across states for taxpayers in specific income groups. The main reason: The TCJA’s annual $10,000 limit on the state and local tax (SALT) deduction.
Take, for example, households in New York, Virginia and Texas, examples of states with high, medium and low levels of state and local taxes respectively. For the three lowest income quintiles in these three states, the average percentage changes in after-tax income from the individual income tax provisions of the TCJA are very close to the national average for each group. But the variation in outcomes is much greater at the top end of the income distribution. In Texas, average after-tax incomes for high-income taxpayers (the top one percent) will rise by 4.1 percent. They will increase by 2.9 percent on average in Virginia and 1.3 percent on average in New York.
If the TCJA’s annual $10,000 limit on the SALT deduction is eliminated from these estimates, the average increases in after-tax income for high-income taxpayers would vary little among these states: 4.6 percent in Texas, 4.9 percent in New York, and 4.3 percent in Virgina.
Note that TPC excluded the effects of the TCJA’s limit on business losses from its analysis since the data do not support state-level analysis of this provision. This provision affects a very small percentage of generally very high-income taxpayers. However, for the major individual income tax provisions of the TCJA, the state-by-state story is pretty clear: For lower-income groups in New York, Virginia, and Texas, the average increase in after-tax income is roughly the same for comparable groups no matter what state taxpayers call home. But, due to the limitation on the SALT deduction, high-income taxpayers can see very different benefits, depending on where they live.
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