Blue State blues -- Trump's tax cut is supercharging job growth in low tax states

On December 22, 2017, President Trump signed a massive tax cut and reform bill crafted by Republicans without the help of one Democrat vote.

One of the bill’s more controversial measures was the limitation of the state and local tax (SALT) deduction to $10,000 through 2026. According to the CPA Journal, taxpayers in California, New York, New Jersey, Illinois, Massachusetts, Connecticut, and the District of Columbia lose the most by the limitation of the SALT deduction. That said, most taxpayers will see their federal taxes reduced, even in high-tax states.

Tax laws, as with the regulatory compliance burden and lawsuit climate, inform business decisions. Money follows earnings. People invest to maximize their returns. Business owners, to the extent they can, look for opportunities to grow their operations and maximize profits.

Now that many small business owners and investors have had a few months to digest the reality of the Trump tax cut and its SALT limitation, it appears job creation is accelerating in low-tax states relative to the high-tax states most affected by the tax law change.

Comparing the most-populous 15 states, there are five high-tax states and ten low-tax states. California, New York, New Jersey, Illinois, and Massachusetts comprise the largest high-tax states. The low-tax list is: Arizona, Florida, Georgia, Michigan, North Carolina, Ohio, Pennsylvania, Texas, Virginia and Washington.

The first quarter of employment data from the U.S. Bureau of Labor Statistics is beginning to show a significant divergence in employment growth between the low-tax and the high-tax states.

In 2017, the ten low-tax states saw seasonally adjusted nonfarm private industry job growth of 1.78 percent. The five high-tax states saw their non-government employment rolls grow 1.66 percent in 2017, not statistically significant from the low-tax states. National seasonally adjusted nonfarm private industry job growth was 1.73 percent in 2017.

The first quarter of employment data from the U.S. Bureau of Labor Statistics is beginning to show a significant divergence in employment growth between the low-tax and the high-tax states. Whether this trend will deepen and consolidate is an open question—the U.S. economy is a highly complex machine with energy prices, labor markets, and trade vying for consideration with taxes and regulations. That said, the job growth trend is clear: low-tax states are leaving the high-tax states in the dust.

In the first three months of the year, seasonally-adjusted nonfarm, non-government employment grew by 0.75 percent in the ten low-tax states, with Texas, Arizona, and Florida leading the way with more than 1 percent growth.

Over the same period, the high-tax states saw nonfarm, non-government employment expand by only 0.38 percent, half the rate of growth of the low-tax peers. Of the big-taxing states, Illinois saw the most sluggish job growth for the first quarter, at 0.11 percent for nonfarm, non-government jobs.

As more and more entrepreneurs and investors consult with their accountants and tax attorneys, this apparent reallocation of capital from high-tax states to low-tax states may grow, with significant potential political ramifications.

With jobs come people and with people come additional Congressional seats after the decennial census in 2020. Every nonfarm worker supports about 1.2 people—mostly children and retired Americans. Should the employment boom in the low-tax states persist, the 10 most-populous states stand to gain about 2 million more jobs than the high-tax states between now and 2020. This job growth supports a parallel population gain of about 7.2 million in the low-tax states vs. 2.7 million in the high-tax states—enough to shift an additional six seats in the U.S. House of Representatives away from California, New York, New Jersey, Illinois, and Massachusetts.

Of course, today’s high-tax states have control over their fate—they can cut taxes and reduce the size of government if they want to compete for jobs in the Trump economy—or not. California politicians, for example, have come up with several bills to increase taxes under the novel theory that, with the big federal tax cut, businesses will still see higher profits if the state doubles the corporation tax.

The limitation of the federal tax subsidy for high-taxing state and local governments is a rare opportunity to field test the economic theory that taxes matter. Most conservatives have long held fast to the notion that, whatever you tax, you get less of. Liberals, on the other hand, claim taxes are a form of “investment.” Time will tell how this economic experiment will work out. But, if early indications are borne out, Pres. Trump’s tax policy will foster the greatest job growth in the states that have done the most to make themselves competitive.