When the implications of the new provision hit home, those high-income taxpayers and business owners will either think about leaving for more welcoming jurisdictions or they will begin to pressure state and local officials to reduce their tax and regulatory burdens.
The problem for the high-tax states is that they have burdensome legacy costs in the form of built-in civil service protections for public employees and pension and health care obligations for employees that cannot easily be reduced. Some states, such as Illinois and Connecticut, are already feeling the pinch of high legacy expenses combined with sluggish economic growth. As the new provision kicks in the vise will tighten on these and other blue states where political pressures drive taxes and spending higher at a time when federal tax policy is suddenly pushing them in the opposite direction.
Blue state governors vies the new SALT deduction limits as a calamity—and understandably so. All of them were elected to represent public employee unions and the major recipients of public spending. The governors of New York, California, and Connecticut, along with the mayors of New York City and Chicago, have spoken out forcefully against the provision. Now that the bill is law they will have little choice but to reckon with its consequences, which are likely to be significant.