How will the tax cuts from the 2018 Tax Cuts and Jobs Act impact Virginia households? The results vary considerably by income bracket, according to a tax calculator published by the Tax Foundation. Higher income households, making over $200,000 per year, will get the biggest income tax breaks as measured in absolute dollars and by percentage of income.
But, despite the hand-wringing over the elimination of the tax deduction for state and local taxes, there is only modest variance among high-income households between high-tax Northern Virginia and other parts of the state.
To illustrate the impact by income category, I selected Congressional District 7, which stands at the geographic center of the state and encompasses a range of higher-income suburban households and lower-income rural households. As seen in the table above, there is very little in the tax package for people making less than $25,000 per year. Of course, given the highly progressive structure of the tax code, people making less than $25,000 per year pay almost no taxes to begin with.
The tax act is fairly generous to working-class and middle-income Virginians but most generous to those making over $200,000 per year. If your No. 1 concern is sticking it to the rich, this bill doesn’t do it. In fact, the Tax Foundation data makes the tax act look like a giveaway to the rich — more or less as its Democratic Party critics described it.
Unfortunately, this static analysis obscures as much as it reveals. By eliminating many deductions employed by the wealthy, tax reform should flush considerable income out of tax shelters into the taxable open. One can predict several things: (1) that taxable income will rise, which (2) will induce hysteria among the social justice warriors obsessed about income inequality without appreciating the difference between gross income and net (taxable) income, and (3) will result in higher tax payments than would be predicted by static analysis. If your No. 1 concern is ensuring that the rich shoulder an increasing share of the income tax burden, then such an outcome is entirely possible under the tax plan — although we won’t know for sure until the data comes in.
Another thing that static analysis overlooks is the impact of the tax cuts on the economy. At a minimum, lower taxes will create more disposable income, some proportion of which will be plowed back into the economy in the form of increased consumer spending. If the money isn’t spent, it will be used either to pay down debt (a good thing) or invested (also a good thing). It seems pretty clear that Democrats’ fears of an economy cataclysm resulting from the tax cuts are not being borne out. In the short run, the cuts clearly are boosting the economy. They’re also boosting deficits, however, which does aggravate the long-term problem of endemic deficit spending and make a Boomergeddon scenario all the more likely.
There is some geographic variability in tax cuts for top-earning households ($200,000 and up), as can be seen in the chart to the left, but it is modest. Fears fanned by critics that high-income earners in high-tax districts might be losers do not appear to be panning out in Virginia. Northern Virginia districts 8, 10, and 11 don’t get tax breaks as big as their high-income earners in other districts, but they do get tax breaks. Big ones. If anyone has a problem, it’s Maryland’s 4th and 5th districts east of the District of Columbia. There, top income earners get tax breaks averaging only $9,000 per household. Is that a big enough difference to induce some to move across the Potomac? We’ll see.