This oldest of adages, or what economists more commonly dub “Foot Voting”, is again proving to be true. The phrase refers to citizens moving from a higher tax domicile to one with lower taxes.
Recently California alone saw an outflow of 24,670 taxpayers with an adjusted gross income (AGI) averaging $1.3M. New York lost 12,040 individuals who earned an average of $1.1M.
The question then becomes, where did they go? The states and the number of high income individuals moving to them include…
Florida – 29,771
Texas – 8,260
North Carolina – 5,792
South Carolina – 5,270
Arizona – 4,365
Why? Just one of the reasons is that Florida and Texas don’t have a state income tax.
Californians pay a tax rate of 12.3% on incomes over $698K. New Yorkers pay between 4% and 10.9%. And if you live in New York City, there’s an additional 1% city income tax on your earnings.
In addition to the tax savings, real estate is also much more affordable in these lower tax states.
Much of this migration is now possible given remote work. If you work for one of the larger tech companies in California, you can now live just about anywhere that has an internet connection.
Moving to save money on your taxes is generally a bad idea because states without an income tax normally make up the difference with other taxes and fees. You might save money on your income taxes, but you find more money going out in other taxes and fees.
It simply takes a certain amount of money to run a state and they have to collect it somehow.
We’re lucky in Illinois to have a flat income tax rate of 4.95%. Given the fact that we don’t have a graduated income tax rate system, this benefits higher income earners who would normally pay much more
But going from paying 10.9% or 12.3% to zero is proving to be too tantalizing for many higher income earners. This trend will probably continue as certain states become more expensive over time.
Let me leave you with this…
Take a moment and think about the implications of this mass migration of higher earners from higher income tax areas. What does this do to the states they are leaving?
It creates a big hole in their budget.
40% of all Americans don’t pay income taxes in the first place. And how many middle class taxpayers does it take to make up the difference when just one higher AGI Taxpayer leaves a state?
A lot. And when they leave states like California and New York, what happens in the next couple of years when those states can’t pay their bills?
The states will probably just raise their taxes even more to make up the difference.
The implications of this phenomenon take on an even greater importance when you apply it to our national elections coming in November. The tax proposals coming from both sides of the aisle couldn’t be more disparate or dissimilar.
Only time will tell which one is more appealing to the electorate in the battleground states.
We’re all going to get through this. Let’s get through it together.
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