Persons attempting to recruit staff in California - and other high tax states - are facing a big challenge, as the Tax Cuts and Jobs Act (TCJA) could now create an added financial burden.
The TCJA limits the amount of deductions people can claim on their federal returns to $10,000 and deductions include property taxes and state and local taxes - known as SALT.
The effect of the act could be to discourage staff from applying for employment in these states - opting to work in lower tax areas and having a big impact on how businesses recruit.
Michael Letizia, a human resources consultant in Stockton, California said:
"I'm fearful that it will have a negative impact, especially to the middle class, middle managers. Those are the backbones of a lot of organizations.”
Most Americans, particularly middle-income workers, will see only a small increase, a reduction or no change in the federal taxes they owe due to the TCJA but the SALT cap could still hurt some families in high-tax states.
According to Michael Letizia, California's property taxes are not as burdensome as some other states - such as New Jersey or Illinois - but the SALT deduction cap has caused some recruiters to rethink their recruitment strategies and devise ways to offer other benefits and compensation that would help to offset any higher taxes and cost of living. He said:
"What are the key changes we're going to have to put into our recruitment, compensation and benefit strategies that are going to continue to attract talent, irrespective of the tax changes? I think we're all kind of scrambling to see what information we can find from whatever resource we can find."
Alex Thornton, Senior Director of tax policy at the Center for American Progress, stated:
“Most workers have a home on which they pay property taxes … and, if they can no longer deduct those property taxes, that's going to have a serious financial impact on them. In states that have high income taxes, as well—high state taxes generally—it's going to present a problem and, in a very real sense, reduce their after-tax income."
However, the true impact of the new law will not be known until taxpayers begin filing their 2018 federal income tax returns.
In some states, California and New York for instance, legislation has been brought in to reduce the effect of TCJA-related burdens on their constituents. Both those states have considered introducing wage taxes on employers to help mitigate the exposure workers would face. In addition, the California Senate, in a bipartisan vote, has passed a bill allowing state taxpayers to make charitable donations to the California Excellence Fund and for their contributions they would receive an 85 percent tax credit.
The author of the bill, Kevin de León, said it gives Californians "a measure of control over their tax dollars."
Frank Sammartino, a senior fellow at the Urban-Brookings Tax Policy Center, disagreed with the assumption that middle-income earners would be most affected and said that the true tax burden would fall on those earning more than $200,000 a year and not middle-income families as reported. He stated:
"The SALT limit is really something that hits higher income people much more."
Michael Letizia, however, said that for companies in California, the new tax law could lead to them losing out on good staff as candidates may decide to opt for jobs in states with relatively lower taxes - like Florida or Texas. According to the Tax Foundation, in 2017 Californians paid the highest income taxes - at up to 13.3 percent - and they also paid the seventh-highest gas taxes during that same period.
Michael Letizia went on to say:
"It's almost hilarious when you take Interstate 80 out of California and you cross over the Nevada state line. The amount of industry that has positioned itself just over the border in the state of Nevada to get out of California's control—distribution centers; a huge amount of commerce—just over the border in Nevada; just over the border in Oregon and just over the border in Arizona. Our border states have definitely been able to take advantage of unhappy California businesses by positioning very lucrative tax incentives and other things just on the other side of the border."
He stated that the HR professionals he works with are mostly concerned about finding and keeping candidates for jobs paying between $70,000 and $130,000.
"We're looking to recruit people out of current positions to gain critical talent," he said. "In order to do that, especially if we're going to recruit into major metropolitan areas in California, coming up with an incentive that isn't going to cost people more money is going to be very interesting. You're looking at manufacturing - you're looking at middle management, middle class - and that is for the Los Angeles area and for the Northern California Bay Area. Those are important groups of people that these regions cannot be short on. Without that worker population, their bosses have no way of getting the job done."
Michael Letizia has stated that he is also of the opinion that California's perks should continue to win over top-tier, executive-level candidates who will not be as greatly impacted by the tax reform law.
