Texans Could Get Hit With New Tax Bill if State Leaves America
Story by Suzanne Blake, Newsweek, 2/5/24
If Texas seceded from the country, Texans could be in for a hefty tax bill.
As conversations around the viability of Texas and other states leaving the union persist, many questions have emerged.
The implications for taxes, Social Security and Medicare would all be up in the air if Texas became its own nation outside of the United States. But experts say the tax question would likely come down to one basic question: citizenship.
Generally, when a U.S. citizen renounces their U.S. citizenship, they will lose their passport and could end up with a heavy exit tax.
“Should Texas secede, the citizenship status of its residents would become a critical issue,” True Tamplin, the founder of Finance Strategists, told Newsweek. “Those who choose or are deemed to retain U.S. citizenship might still be liable for U.S. taxes on global income, depending on the agreements between the new Texan government and the United States. The U.S. imposes taxes based on citizenship, not residency, so renouncing U.S. citizenship would be a significant step for those seeking to avoid U.S. taxes entirely.”
Exit taxes are for those considered “covered expatriate” if they have a certain type of income that falls into the exit tax categories, like mark-to-market gains and specified tax-deferred accounts.
Different from a wealth tax, exit taxes don’t specifically look at your net worth to determine the amount of money you’ll have to hand over. Instead, it looks at multiple factors.
People with an average annual net income tax for five years above a certain inflation-adjusted amount could be liable to pay. The same is true for those with a net worth of $2 million or more on the day of the secession.
Keep in mind, exceptions are included for dual citizens and certain minors if they file Form 8854 and have complied with all federal tax obligations.
Every Texas resident would likely have to file a final Form 1040 tax return for the year the state seceded.
The exit taxes generally apply to all mark-to-market gains on assets that grew in value while a person was a U.S. citizen, including stocks. But IRA accounts, foreign pension plans and some domestic and foreign trusts will get taxed as well.
However, if Texas residents didn’t automatically terminate their citizenship, then exit taxes would no longer be a concern. Still, many might be required to pay taxes on their income, similar to how an American living abroad would be required to.
“There are many U.S. citizens that live all over the world and those citizens are still legally required to pay taxes on their incomes, even though they are not living within the United States,” Webster University professor William Hall told Newsweek. “So, even if you are no longer living in a state that is within the United States, you would still be required as a US citizen, to pay taxes on your income.”
In all likelihood of a secession situation, matters like taxes and Social Security would be battled over during negotiations.
“The financial futures of the people would be used as negotiating tools between the Republic of Texas government and the United States,” Jason Nelson, a retired U.S. Army soldier, Marine and civil affairs specialist living in Texas, told Newsweek. “Social Security in particular would be held hostage, forcing Texans to either abandon their American citizen benefits or move out.”
If Texas was able to make its way out of the country without federal taxes, Nelson anticipates many moves to and from the state.
“It would be a massive economic upheaval that would last decades, but at the end of the day, it’s very possible that Texas could come out of the turmoil in a very bright situation,” Nelson said.
That doesn’t mean Texans would be totally in the clear when it comes to taxes, however. In the absence of a federal tax, Texas would likely need to implement its own to raise a sufficient amount of revenue, experts say.
Is Secession Likely?
While 211,000 people are following the Texas Nationalist Movement page on Facebook, the legality of Texas seceding from the union is very much in doubt.
“The language implies that a state has no right to sever the bond between a U.S. citizen and that national government through secession or otherwise,” Hall said of former president Abraham Lincoln’s statements and the Fourteenth Amendment Citizenship Clause.
In a Texas v. White Supreme Court ruling from 1868, justices said secession is not permitted under the U.S. Constitution.
Texas-based financial advisor and Houston First Financial Group president Christopher Hensley said the idea of secession often pops up during election years but rarely fosters any substantial political movement.
“The idea of Texas, or any state, seceding from the Union remains, in my opinion, an election year ‘nothing burger,'” Hensley told Newsweek. “It’s a concept that garners attention but lacks practical substance. No state has successfully seceded since the Civil War, and doing so would mean abandoning the myriad benefits of the social contract established upon joining the United States.”
While the discussion around Texas seceding from the United States might make compelling discourse, Hensley said benefits like the lack of state income tax could disappear if Texas actually seceded.
“The average Texan might not be ready or inclined to embrace the sacrifices that would come with secession,” Hensley said. “The prospect of introducing state taxes, among other financial adjustments, could be a stark departure from the benefits we’re accustomed to, especially the lack of a state income tax.”