Americans Startled by Impact of New Tax Law on Returns

By Elizabeth Guner

Knowledge@Wharton invited Senior Economist at PWBM, Richard Prisinzano, on as a guest speaker on March 12, 2019, as well as the Center for Tax Law and Policy’s Michael Knoll, to discuss the impact of the TCJA’s tax changes on tax filers this year.

Prisinzano brought attention to the fact that the new tax law made adjustments to withholding so that paychecks are a bit larger but refunds will be a bit smaller. Yet, overall, most taxpayers still gain from the new law.

Knoll identified the new $10,000 limit to the State and Local Taxes (SALT) deduction as having the greatest impact, especially for coastal states. Prisinzano discussed how those with income between $100,000-$500,000 will now likely take the new larger standard deduction, rather than itemizing, because the SALT deduction is not as beneficial as under the old tax law. States like New York and California are going to become more expensive for high-income individuals, and some are concerned that “millionaires” will move away from those states. Prisinzano noted that millionaires don't respond to taxes quite the way that some budgeteers think. As he explained: “And so while I think the effect could be big, I don't think it's quite as large as some of the states expect." Knoll supported this, saying, "That makes sense. I mean, a lot of people are where they are because of jobs probably being the principal reason and then sometimes other reasons, family, etc...[so they are] not really able to easily evade it by going elsewhere."

Prisinzano explained that there is not a lot of economics backing the SALT deduction, and as a result, the SALT cap has varied throughout history. Prisinzano noted that some states are crafting workarounds to the SALT cap. However, those workarounds could have unintended consequences. For example, workarounds could affect eligibility for the child tax credit.

One caller pointed out that the repeal of the unrereimbursable expenses tax credit could have a significant impact on some employees. That repeal could spur some employees to recharacterize themselves as pass-through businesses.

In conclusion, with regard to the TCJA simplifying the tax-filing process, Prisinzano explained that for non-itemizers, the form is now simpler. However, for people itemizing there are now more forms than before.