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Tax Reform Forces States to Compete with Each Other

September 14, 2018 in Economics

By Chris Edwards

Chris Edwards

The Republicans passed the Tax Cuts and Jobs Act last year, but
the battle over the legislation is not over. Some high-tax states,
such as New York, have passed schemes to try to get around a
centerpiece of the law, the cap on federal deductions for state and
local taxes. New York governor Andrew Cuomo called the cap “repugnant to this state,
repugnant to the Constitution and the values of the American
people.”

The governor is wrong about that, but why is he so outraged?

The cap and other changes under the law have subjected 25 million mainly higher-income households to
the full bite of state and local income, sales, and property taxes.
This is a painful change for high-tax states, and it will magnify
the difference between, say, New York City’s top income-tax
rate of 12.7 percent and Florida’s of 0 percent.

As Cuomo has recognized, higher-income taxpayers will
increasingly “vote with their feet” and move out, which
will hammer some state budgets. The top 1 percent of earners pays
41 percent of state income taxes in New York
and a huge 50 percent in high-tax California.

They no longer can hike
taxes and expect federal deductions to make up part of the
difference.

We don’t know how many people the law will prompt to move,
but we can look at past trends to get an idea. Internal Revenue
Service migration data show that 2.8 percent of
households moved between states in 2016, with some states losing
residents and others gaining, on net. The largest loser states were
generally high-tax places such as New York, Illinois, New Jersey,
California, and Connecticut. The largest gainer states were low-
and medium-tax places such as Florida, Texas, Washington, North
Carolina, and Colorado.

Overall, the IRS data show that almost 600,000 people moved, on
net, from the 25 highest-tax states to the 25 lowest-tax states in
that single year. This migration pattern has been ongoing for
years, even before the new tax law intensified the relative pain of
living in high-tax states.

Based on the IRS data, we can calculate the ratio of migration
inflows to outflows for each state. In 2016, New York’s ratio
was 0.65, meaning for every 100 households that left, only 65 moved
in. Florida’s ratio was 1.45, meaning that 145 households
moved in for every 100 that left.

Where are people leaving and where are they going? Of the 25
highest-tax states, 24 of them had net out-migration. Of the 25
lowest-tax states, 17 had net in-migration. Taxes appear to be
steering interstate movers.

High earners are …read more

Source: OP-EDS

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