House Democrats haven’t given up on repealing the 2017 tax reform’s cap on deducting state-and-local taxes. And if you want to know why, take a look at the latest Internal Revenue Service data showing a huge wealth exodus from high- to low-tax states.
Each year the IRS publishes data on the migration of taxpayers and aggregated adjusted gross income between states. Its latest release for 2020 shows that migration from high- to low-tax states surged amid pandemic lockdowns and a shift to remote work.
The biggest winners were Florida ($23.7 billion), Texas ($6.3 billion), Arizona ($4.8 billion), North Carolina ($3.8 billion), South Carolina ($3.6 billion), Tennessee ($2.6 billion), Nevada ($2.6 billion), Colorado ( $2.3 billion), Idaho ($2.1 billion) and Utah ($1.3 billion). Idaho, Wyoming, Montana, Florida and South Carolina gained the most as a share of their 2019 income.
The biggest losers: New York (-$19.5 billion), California (-$17.8 billion), Illinois (-$8.5 billion), Massachusetts (-$2.6 billion), New Jersey (-$2.3 billion), Maryland (-$1.9 billion), Ohio ( -$1.4 billion), Minnesota (-$1.2 billion), Pennsylvania (-$1.2 billion) and Virginia (-$1.1 billion). New York, Illinois, Alaska, California and North Dakota lost the most as a share of 2019 income.
Population migration from the Northeast and Midwest to the Sun Belt isn’t new, but balmy weather doesn’t explain it all. California has the best climate in the country. It also has among the highest taxes and cost of living. Californians making between $61,215 and $312,686 pay a top marginal tax rate of 9.3%. California taxes the middle class like they’re rich.
Notably, four of the 10 states that gained the most income in 2020 don’t impose an income tax (Florida, Texas, Tennessee and Nevada). The others generally have low tax burdens. States losing the most income generally have high income and property taxes. Taxes aren’t the only factor in migration. Schools, quality of life and cost of living also matter.
Yet high-tax states don’t provide better public services and often have worse schools and public works despite spending more. Democrats seem to forget that taxes are supposed to represent the cost for providing government services, not a penalty for making money or means for income redistribution.
These states are pricing themselves out of the market for mobile taxpayers. The SALT deduction helped mitigate the tax sting, but since 2018 the upper-middle class and wealthy have felt the full pain. No surprise that more are fleeing to low-tax states, especially now that many have the freedom to work remotely.
It’s also notable that migration has accelerated since the cap on the SALT deduction took effect. California lost $8 billion in 2018, $8.8 billion in 2019 and $17.8 billion in 2020. But Texas gained $3.5 billion in 2018, $4 billion in 2019 and $6.3 billion in 2020. The average adjusted gross income of people leaving high-tax states has also generally increased.
Wealth migration over time significantly affects state fiscal and economic health. The annual loss of income has a compounding effect year after year. Lost income in one year is added to lost income the next, as the tax base continues to erode. The opposite is true for Florida, where income gains compound.
When states lose taxpayers, they lose tax revenue that supports public services. Democrats in liberal states try to compensate by raising taxes, which drives away more people. This un-virtuous cycle keeps repeating itself in New York, New Jersey and Illinois.
House Democrats representing suburban districts in high-tax states campaigned in 2018 on repealing the $10,000 SALT limit. Yet progressives complain this would be a giveaway to the rich. They have a point. Many high-tax states—including California, New York, New Jersey, Massachusetts and Illinois—have enacted work-arounds to help pass-through business owners (who file using the individual tax code) dodge the SALT limit. But these don’t help wage earners with hefty capital-gains and property tax payments.
In April Reps. Mikie Sherrill, Josh Gottheimer and Tom Malinowski of New Jersey, Katie Porter (Calif.) and Tom Suozzi (NY) called for including a measure in next year’s budget to prohibit the IRS from using funds for “regulatory guidance or rulings that restrict the ability of state governments to enact legislation or policies that provide relief to taxpayers.”
The better answer would be for these states to lower their tax and regulatory burdens to make living in these states more affordable. Until they do, the great migration that accelerated in the pandemic will continue.
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