High-Tax States Could Struggle to Lure Out-of-State Workers

By Tacuma R. Roeback March 5, 2018
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​Silicon Valley

​If a recruiter wanted to persuade a job candidate to move to California, she would probably resort to highlighting these old reliables: great weather and high wages.

But that may not be enough to sell candidates on moving to a state where residents pay some of the nation's highest state and local taxes. And now, the massive Tax Cuts and Jobs Act (TCJA) could create an added financial burden for Americans living in California and other high-tax states.

The TCJA limits to $10,000 the amount of deductions people can claim on their federal returns. Those deductions include property taxes and state and local taxes, commonly referred to as SALT.

The impact of the act could be far-reaching, affecting how businesses pursue talent; it could even compel families to opt for states with lower taxes and significantly lower living costs. 

"I'm fearful that it will have a negative impact, especially to the middle class, middle managers," said Michael Letizia, a human resources consultant in Stockton, Calif. "Those are the backbones of a lot of organizations."

Even though most Americans, particularly middle-income workers, can expect to see only a small increase, reduction or no change in the federal taxes they owe due to the TCJA, the SALT cap could still hurt families that choose to itemize, mainly those in high-tax states.

"Most workers have a home [on which they pay property taxes] … and, if they can no longer deduct those property taxes, that's going to have a serious financial impact on them," said Alex Thornton, senior director of tax policy at the Center for American Progress. 

"In states that have high income taxes, as well—high state taxes generally—it's going to present a problem. And, in a very real sense, reduce their after-tax income."

Although California's property taxes aren't as onerous as, say, those in New Jersey or Illinois, the SALT deduction cap has some talent acquisition professionals rethinking their recruitment strategies, Letizia said. Recruiters will have to devise ways to offer benefits and compensation that would help to offset any higher taxes and a relatively higher cost of living.

"What are the key changes we're going to have to put into our recruitment, compensation and benefit strategies that are going to continue to attract talent, irrespective of the tax changes?" Letizia said.

"I think we're all kind of scrambling to see what information we can find from whatever resource we can find." 

The States React

The true impact of the new law won't be known until taxpayers begin filing their 2018 federal income tax returns.

In states like California and New York, lawmakers have pursued legislation to mitigate what they see as TCJA-related burdens on their constituents. Both states have considered wage taxes on employers to help offset the exposure workers would face. 

With an eye toward the TCJA SALT limit, the California Senate, in a bipartisan vote, passed a bill that would allow state taxpayers to make charitable donations to the California Excellence Fund and receive an 85 percent tax credit for their contribution.

Senate Leader Kevin de León, D-Los Angeles, who authored the bill, said it gives Californians "a measure of control over their tax dollars."

However, Frank Sammartino, a senior fellow at the Urban-Brookings Tax Policy Center, said the true tax burden would fall on people making more than $200,000 a year, not middle-income families, as has been widely reported.

The complex calculus of the tax reform law will impact middle-income workers differently from state to state.

"The SALT limit is really something that hits higher income people much more," said Sammartino.

He added that the TCJA does raise the standard deduction, which should compel middle-income families to not itemize on their federal returns. And if they did itemize, said Sammartino, most would still not see state and local taxes that would rise above $10,000. 

Worker Exodus?

In 2015, the average California taxpayer claimed $18,438 in state and local tax deductions.

Californians paid the highest income taxes in the nation in 2017 at up to 13.3 percent, and they also paid the seventh-highest gas taxes during that same period, according to the Tax Foundation.

As for companies in California, Letizia said, the new tax law could lead to them losing out on talent. Candidates may opt for jobs in states with relatively lower taxes, like Florida or Texas.

Or states that border California.

"It's almost hilarious when you take Interstate 80 out of California and you cross over the Nevada state line," Letizia said. "The amount of industry that has positioned itself just over the border in the state of Nevada to get out of California's control—distribution centers, a huge amount of commerce—just over the border in Nevada, just over the border in Oregon, just over the border in Arizona.

"Our border states have definitely been able to take advantage of unhappy California businesses by positioning very lucrative tax incentives and other things just on the other side of the border."

Could that also mean other states might tap into a pool of unhappy California workers?

Letizia said the HR professionals he works with are mostly concerned about finding and keeping candidates for jobs paying between $70,000 and $130,000.

"We're looking to recruit people out of current positions to gain critical talent," he said. "In order to do that, especially if we're going to recruit into major metropolitan areas in California, coming up with an incentive that isn't going to cost people more money is going to be very interesting."

He said that California's perks should continue to win over top-tier, executive-level candidates who will not be as greatly impacted by the tax reform law.

"You're looking at manufacturing, you're looking at middle management, middle class and that is for the Los Angeles area, for the Northern California Bay Area. Those are important groups of people that these regions cannot be short on," Letizia said.

"Without that worker population, their bosses have no way of getting the job done." 

Tacuma R. Roeback is a freelance writer who lives in the West Palm Beach, Fla., area.

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