Ray Dalio’s Tax Reform Bets: Florida, Nevada, Arizona

The Bridgewater Associates founder argued that proposed tax changes would have polarizing effects, benefiting some states above others.

Ray Dalio (Peter Foley/Bloomberg)

Ray Dalio

(Peter Foley/Bloomberg)

Bridgewater Associates founder Ray Dalio said investors should “watch out” for the polarizing effects of the GOP’s tax plan in American states and cities.

In a new LinkedIn post Tuesday, the chairman and chief investment officer of the world’s largest hedge fund said that proposed tax reforms would benefit only states with low state and local taxes, as a result of a phenomenon known as tax migration, the practice of high-income taxpayers relocating to escape high taxes.

Given that the tax law changes would also be good for businesses and business owners, businesses in low-tax states could receive a “double whammy benefit,” Dalio explained.

The state and local tax (SALT) deduction is a federal tax break used primarily by high earners in cites and states with high local taxes. It allows those paying high taxes locally to pay less in federal taxes.

But legislation approved by the Senate includes a complete elimination of the deduction, while a bill passed by the House of Representatives only allows for a deduction up to $10,000. The Senate and House are now reconciling the two separate bills, so the SALT elimination is not final, but it’s expected to be included in the final bill.

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According to Dalio, if the SALT deduction is eliminated, high earners in heavily taxed states will move themselves (or their money) to low-tax locations. This will put a strain on states with high taxes, including driving down property values, Dalio argued.

“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,” he wrote.

As an example, Dalio pointed to New York City, where “cost arbitrages” drove people from the Upper East Side to downtown neighborhoods and eventually to Brooklyn.

According to “rough estimates” made by Dalio and his colleagues, Dalio predicted that New York, along with Connecticut, New Jersey, California, and Illinois, will be the states hardest hit by a SALT elimination. The states that he said stand to benefit the most include Florida, Texas, Nevada, Washington, and Arizona.

Dalio said he plans to further analyze how states’ finances and municipal bonds will be impacted by the proposed reforms.