Tuesday, May 08, 2018 by Isabelle Z.
New tax rules are poised to spur a mass exodus from states like New York and California – places that are already struggling to hold on to residents. In the last ten years alone, around 3.5 million people have left these high-tax states in favor of lower-tax states like Florida and Texas.
According to a Wall Street Journal essay by Stephen Moore and Arthur Laffer, New York and California can expect to lose around 800,000 people over the coming three years, which is nearly double the exodus noted in the last three years. Meanwhile, Minnesota, Connecticut and New Jersey will lose roughly half a million people in the same period of time.
That’s because of changes to SALT, the State and Local Tax deduction, which will limit the deduction people can take for local and state taxes to $10,000. This means many people who have high incomes will be facing a tax increase. According to the estimates of Moore and Laffer, the effective income tax rate that high earners in California will actually pay will go from 8.5 percent to 13 percent, while those who earn $10 million or more in New York could well see a tax hike of 50 percent or even greater.
The authors believe this exodus could have the effect of raising the real estate values in lower-tax states, while those in high-tax states would go down. They also point out that high earners cost these states the most when they leave. According to the office of New York Governor Andrew Cuomo, eliminating the full SALT deductibility could cost his state $14.3 billion.
In California, there are concerns because the income taxes the state collects from high earners are used to pay for a huge portion of government services. The wealthiest one percent in the state cover 48 percent of the income tax there, which means that just a few wealthy families leaving could create a significant reduction in state funds.
However, some experts believe that the extremely wealthy simply don’t care about the added expense and will stay where they are. The tax law could therefore end up being just another reason that small and medium-sized entrepreneurs will want to leave their states. Indeed, one business advisor in Orange County, California, Joseph Vranich, told the Sacramento Bee that the combination of high income taxes, gas taxes, and stringent environmental laws sends clients to other states. “When you add it all together, I call it death by a thousand cuts, and this latest law is one more cut,” he stated.
There is no tax on earned income in Florida and Texas, and the two states have attracted 850,000 and 1.4 million new residents respectively in the years since 2007 from other U.S. states, while New York and California have lost more than 2.2 million people combined during the same time frame.
For now, the low-tax states are happy to welcome new residents fleeing high-tax states. The governor of Texas, Greg Abbott, has encouraged people in the high-tax state of New Jersey to head to his state instead, which boasts a recent $4 billion tax cut. His invitation came in the wake of a budget proposal by New Jersey Governor Phil Murphy that asked for a $2.7 billion rise from the budget for the previous year.
However, those who blame liberal Californians and New Yorkers for their states’ problems worry that the states that are now welcoming them will ultimately suffer as a result.
Sources for this article include: