Dalio Confirms GOP Tax Plan "Good For Business", Bad For Democratic States

Confirming what many have suggested, the billionaire founder of the world's largest hedge fund, warns in his latest letter to watch out for the effects of tax reform on migration, the fiscal conditions of affected states and cities, and an increased polarity in America.

Birdgewater's Ray Dalio writes (via LinkedIn),

While we have talked a lot about the effects of growing wealth and opportunity disparities in America, we haven’t talked enough about the tax migration that is taking place because of growing differences in state and local tax rates. This tax migration issue is especially important to focus on now because of the expected elimination (under the new tax legislation) of the deductibility of state and local taxes (SALT) against federal income taxes.

The dynamic that I’m referring to is the inevitable and self-reinforcing process in which those high SALT locations that a) have big disparities in income and fiscal shortfalls and b) can neither cut their financial supports to the “have-nots” (because their conditions are already unacceptably low) nor raise taxes on the “haves” (because they will move due to tax rates) suffer from tax migration.

Of course, those low SALT locations with the opposite circumstances benefit from this migration.

The dynamic works as follows. As state and local tax rates and debts rise because there are shortfalls that can’t be narrowed, it is financially smart for high income taxpayers to escape these taxes and debt burdens by moving to lower tax and less indebted locations, so they do. As they do, property values decline, further raising the costs of staying in the high SALT location. In other words, the financial cost of being in one of those high tax locations equals the tax rate difference plus the property value decline, which can be substantial. Also, the reduced population of higher income and higher spending folks leads to reduced spending in these locations, which further depresses the high SALT economies. Also, the fiscal conditions of these locations suffer. Because both the remaining high income and low income folks are increasingly stressed and tend to blame the other, tensions rise, which makes these environments even more inhospitable, which further contributes to high income earners’ emigration. Realizing this, other locations increasingly appeal to the “haves” by offering tax incentives and creating environments in which they are more comfortable living with other “haves.” For these reasons, this “hollowing out” dynamic is self-reinforcing. Of course, the reverse is true in states that attack these rich tax migrants. This dynamic causes even greater polarity. Because the rich and the poor typically have different values, which are also reflected in different laws and different politics, it probably will make the polarity greater and conflicts even more intractable.

It appears to us that the expected new tax law that eliminates the state and local deductions against one’s federal income taxes will significantly contribute to this dynamic. Consider the fact that this change in SALT deductibility is one of the largest increased sources of revenue in the tax bill, accounting for nearly $1 trillion in new taxes over the next 10 years. In other words, it is expected that those people who stay in high tax states will pay nearly $1 trillion more to stay there. Of course, these changed rates will prompt more people in high SALT locations to consider moving. To the extent they do move, it would increasingly lead to more prosperous states that are occupied by, and cater to, more rich people and more depressed states that are occupied by, and cater to, more poor people, and increased polarity between them.

While we are talking about the tax migration, we see such location cost arbitrage motivated migrations happen all the time, so we should be well acquainted with them. For example, in New York City we saw migration from the Upper East Side to Downtown and then to Brooklyn brought about by cost arbitrages. Every area in the world has this sort of cost and desirability motivated migration going on constantly. Cost differences drive migrations that change the characters and costs of neighborhoods and happen in self-reinforcing ways until the cost differences change to make the newly hot neighborhoods expensive and other areas relatively cheap, so the immigration shifts to emigration.

Estimating the Impact of Cutting the SALT Deductions

We played around with the numbers to get a feel for the directions and the impacts of this, and we show our scratch pad estimates below. We will first show our very rough estimates of the impact of ending deductibility on state tax revenues and migration patterns. 

First, to summarize, we estimate that:

  • Ending SALT deductibility will result in a sizable increase in the effective tax rate faced by high earners in high tax states (3-5% for most making over $500,000), notable outbound migration of high income filers (we estimate 1-2.5% will leave for most states we looked at), and a hit to state tax revenues (around 1%). In our opinion, these numbers understate the impacts, especially for the highest taxpayers (who pay the most taxes), because it is the nominal level of dollars of increased taxes that matters more than percentages, and we don’t fully account for all the second- and third-order consequences previously mentioned. In terms of economic impact, we estimate that it is the present value of all future year tax differences (and other costs such as declining real estate values) that is the best gauge of the cost of staying, and these are very big numbers. As I just noted, the effects on property values and living conditions are not properly considered in our estimates. Already, without the SALT deductibility changes, some higher SALT states are experiencing notable outbound migration (shown further below), which is straining tax revenues and risks the strengthening of a downward spiral where states adjust by cutting spending/raising taxes, which encourages even more people to leave.

  • Still, the table below conveys a rough picture of where the vulnerabilities lie. It shows a) the existing marginal tax rate, b) the effective tax rate with the deduction, c) the effective increase in the tax rate due to the elimination of the deduction, d) that increase relative to the US average and e) relative to states they are likely to emigrate to (e.g., their neighbors), f) the estimated medium-term size of the migration as a percent of the high earning population,* g) the estimated number of high earners leaving, h) the lost tax revenue to the state, and i) that lost tax revenue relative to the total tax revenue of the state. To be clear, these are VERY IMPRECISE ESTIMATES. 

We looked at a number of factors to come up with our rough estimates, so we will show you some. 

While the previous table looks at the impact of migration on state budgets, below we show a simpler cut: our rough estimates of how relative incomes between states will change when people in high tax states get a greater tax increase than people in low tax states. The chart on the left shows the absolute levels in real per capita earnings by state versus the national average before and after the tax change. These numbers are adjusted by what the Bureau of Economic Analysis believes about relative price levels between states (trying to get at some measure of competitiveness). The chart on the right shows the net shift that occurs with the tax change. As you can see, states with both higher than average incomes and higher than average taxes (especially New York, Connecticut, New Jersey, and California) are most vulnerable by this measure.

The vulnerability of a state to tax emigration is also affected by tax revenue being concentrated in the hands of those high income earners who are most affected by the changes. This concentration is shown below for the states with the highest income taxes. 

For these states, the high earning taxpayers are a very small proportion of the population—from 0.5% of households in Vermont to 1.7% in DC and Connecticut. That means that it would take only a tiny percentage of the population to move to have a devastating effect on the state’s finances. Clearly, all of these states are very vulnerable.

The next two tables show the states where people have been leaving fastest from and going fastest to, and a number of influences on these movements, such as economic conditions and the tax burden. 

As you can see, everything points toward states like New York, Connecticut, New Jersey, California, and Illinois being the most vulnerable, and states like Florida, Texas, Nevada, Washington, and Arizona benefiting the most from this shift.

Our look at these states’ finances and their muni bond markets will follow in the next few days. 


As for the effects of the budget changes, below we show where the money is expected to come from and where it is expected to go.

So, our big picture perspective is that, on the margin, the tax law changes are going to be significant and bad for high SALT locations and good for low SALT locations, and are going to be good for businesses and business owners (and hopefully those who the money trickles down to), so those businesses in low SALT states will get a double whammy benefit.


knukles Tue, 12/05/2017 - 12:07 Permalink

Sneaking into the country doesn't make you an "Immigrant" any more than breaking into somebody's house makes you "part of the family".Get off my lawnThe tax bill does nothing for me, you or Joe 6pack.  Corporations, booyah.  Meaning the repatriation of funds/lower tax rates will free money for bonuses and stock buybacks.  Seriously good for stocks     InitiallyAfter, since you, me and Joe comprise 66 2/3 % of the economy, we ain't got anymore money to spend than we did.  Future shock.Get off my lawn

FreeMoney overbet Tue, 12/05/2017 - 16:34 Permalink

And yet no discussion on the spending by gooberment side of the equation. Why is that relevant?  Because when the gooberment enters into debt, your children and grand children are enslaved ( as there is never any intention to repay by the current borrowers ) or the invisible tax of print mo catches everyone, rich, poor, corporations and most particularly the savers.

In reply to by overbet

Keyser FreeMoney Tue, 12/05/2017 - 20:21 Permalink

The tax bill was designed to penalize Dim states... I can't wait to see people in those states flee when they get their property tax bills next year and cannot right off the amount on their federal taxes... The whining and bellowing has just begun... And they thought the ACA was good, what until the shoe is on the other foot at the IRS... 

In reply to by FreeMoney

swmnguy knukles Tue, 12/05/2017 - 12:58 Permalink

Quite right, Knuks.I live in a higher tax state, which is also home to more Fortune 500 companies per capita than almost any other.  So the tax bill will be bad for the state but good for business?  Huh?  The businesses choose to be here because it's an attractive place to live, due largely to what we get for our taxes.  We always hear that we have a terrible business environment and yet the businesses stay and expand.Nobody wants to live in South Dakota if they have a choice. It isn't all about skipping out on taxes.  And tax cuts do nothing for people who can barely afford rent and barely pay Federal Income tax in the first place.  The problem with the US economy is demand, not supply.

In reply to by knukles

dgc0101 AlphaSeraph Tue, 12/05/2017 - 12:15 Permalink

Agreed. Why is it the responsibility of the Federal Government, and by extension other more reasonable tax jurisdictions, to offset the poor fiscal management of states that refuse to either prioritize or control their spending? Perhaps this way the citizens of these states will have the ability to now make the conscious choice to tax themselves into oblivion?Time to pay your own "fair share".

In reply to by AlphaSeraph

AlphaSeraph dgc0101 Tue, 12/05/2017 - 12:23 Permalink

Hopefully California commies and NYC commies have an OH SHIT moment and realize Texas, Florida and the Bible Belt have been paying their way for a long time. I know it's a different world now, but it wasn't that long ago that California was the driving force behind Reagan's Presidency.

In reply to by dgc0101

LawsofPhysics Juggernaut x2 Tue, 12/05/2017 - 12:39 Permalink

Well, if you ignore things like government subsidies and Federal "innovation" grants going to all those tech and finance companies, yes, that's correct. Moreover, what sort of natural resources and agricultural production does a state like New Jersey have?  LMFAO!!!I wonder why they haven't left the union yet?Go ahead fuckers, leave already! States with the resources they need will be happy to charge them a lot more, if they decide to deal with these asshats at all.

In reply to by Juggernaut x2

dgc0101 LawsofPhysics Tue, 12/05/2017 - 14:20 Permalink

It's even more straight forward than that.Many of the states that are receiving excess balance of payments from the Federal Government do so because the Federal Government has a major presence in that state. Think places like: Virginia due to the vast apparatus of Washington DC, including the Naval base near Norfolk, North Carolina with the huge DOD presence due to bases like Camp Lejeune and Fort Bragg, the NIH in Bethesda, Maryland, the NSA in Utah, Los Alamos National Laboratory in New Mexico and so on. Even California benefits from this kind of money. However, things change when all we are talking about is Federal transfer payments for education and social services. The states that are most worried about the loss of SALT deductions are rightfully afraid that they can no longer act with impunity with taxes and then have the rest of the nation pick up the tab; the high earners in their states are mobile and can move at will, which will only cause their finances to spiral deeper into the red.  The only way to stop that would means no more things like sanctuary cities, extravagant and unfunded pensions for public employess and virtue signaling over politically correct visions of the world. Instead, they just might have to use scarce public dollars to fund schools that actually TEACH students and make certain the roads and infrastructure is not crumbling. Imagine that!

In reply to by LawsofPhysics

LawsofPhysics dgc0101 Tue, 12/05/2017 - 14:41 Permalink

Correct.  Don't forget, California has TWO of the country's four synchrotron rings!!! Massive DOE/DoD research facilities like CERN that burn through money like water......admittedly, at least we learn something from these efforts, but still, yeah, let's see California live without Federal dollars, please!

In reply to by dgc0101

dgc0101 LawsofPhysics Tue, 12/05/2017 - 16:02 Permalink

Yes, agreed. The Advanced Photon Source at Argonne National Laboratory, Fermi Lab and the National Nanotechnology Initiative (via Northwestern, U of Chicago and UI-Urbana-Champagne) benefits Illinois too, at least from a scientific point of view.One of my personal favorite instruments of this type is LIGO, which led to the detection of gravitational waves and the 2017 Nobel Prize in Physics for Kip Thorne, Rainer Weiss and Barry Barish. Met Kip Thorne. Genuinely brilliant and amicable man!

In reply to by LawsofPhysics

small axe Tue, 12/05/2017 - 12:14 Permalink

So our "perfect union" is basically dependent on tax law and perfect distribution of oligarchs.Nice.Wake me when the flames reach the Emperor's Palace.

Juggernaut x2 Tue, 12/05/2017 - 12:15 Permalink

Don't worry,  Low Tax States- the assholes that are swarming to your states like locusts will bring their free-spending ways so in 10-20 years there will be nowhere to escape to

buzzsaw99 Tue, 12/05/2017 - 12:16 Permalink

the mortgage deduction was good for the banks at one point.  now that the gubbermint agencies hold most of the mortgages and interest rates are much lower the banks don't receive as much, that's why they don't mind getting rid of it.  the new tax bll is designed to do two things, first and foremost, benefit the big banks and big business.  second, punish the blue states.  if they were eliminating the mortgage deduction because it is the right thing to do by adhering more closely to the tenets of a philosophically capitalist society that would be one thing.  to gore half the populations' ox by employing a bank friendly vendetta of a tax bill is quite another.this is a really bad idea and there will be powerful political blowback imo.

Omen IV buzzsaw99 Tue, 12/05/2017 - 13:51 Permalink

BullShit !         its a good idea - the high end or the less than 5% of the earners o the top end cant control the voting of the black and brown who DeBlasio caters to with a trade for votes against welfare  - so whats the next best thing - put a cap on the income transfer - and all else will followThe marginal IQ's less than 100 can only exist in the advanced economies with welfare against lower and lower wages as AI - Artificial Intelligence takes the marginal valueNYC is that bright shining city on a hill for creativity and the advancement of civilization which must be preserved - the low end all need to go to Chicago / Baltimore / CA /...........?  

In reply to by buzzsaw99

Theos Tue, 12/05/2017 - 12:20 Permalink

People who are >500k/y and live in high SALT states are not going to move becuase their choice of living space is not worth the tax savings.  The people who get screwed are those who are in SALT states who make enough to exceed the std deduction but do not have simmilar mobility (ie 200k).  They're running out of ppl to screw.

headless blogger Tue, 12/05/2017 - 12:26 Permalink

I can't see how any of these tax deductions will help any working person, many who voted for Trump. This President is vindictive and is evil. He doesn't care who gets mowed down in his lust to take out the Leftists. He's nothing but an emotional windbag; similar to what many women would be like in office (not all....there are some decent women out there....I married one!).