By Andrew Wilford
It’s a time-tested axiom for tax policy: the more you tax something, the less you get of it. Unfortunately for states used to subjecting their victims — ahem, residents — to punitively high taxes, that also holds true for the taxpayers themselves.
The latest IRS tax migration data, covering tax year 2019-2020, shows that the trend of taxpayers sprinting for the exits of high-tax states is only accelerating. It’s no coincidence that the states known for treating their taxpayers like milk cows lost the most taxpayers — a loss that was the gain of states with more competitive tax codes.
The two biggest losers in this sense are, unsurprisingly, New York and California. New York lost, on net, 130,000 taxpaying households and $19.5 billion in adjusted gross income (AGI) from its tax base. California, meanwhile, lost 117,000 taxpaying households on net, along with a net of $17.8 billion in AGI in that one-year span alone. Illinois was third, but still lost a net of 51,000 households and $8.5 billion.
And for high-tax states, taxpayers voting with their feet is only becoming more of a problem. California and New York, for example, each lost more money from their tax bases than they did the previous two years combined. The amount New York lost from its tax base is about equal to the amount it lost from 2011-2015.
While that increased rate of departure should cause New York and California to rethink their tax codes, the reality of the trend is likely even starker than this data shows. That’s because this data covers the tax year before the pandemic hit and remote work rapidly became a far more viable work situation.
High-tax states are very afraid of remote work, and for good reason. Freed of the need to congregate in overpriced, overcrowded “job hubs,” taxpayers often choose to live somewhere with more manageable costs of living.
Unfortunately, rather than attempting to make their tax codes more competitive, high-tax states often instead try and prevent taxpayers from escaping their tax webs. New York, for example, enforces a “convenience of the employer” rule, which requires residents who switch to working remotely in another state to continue paying income taxes to New York so long as they could possibly have continued to do the work in New York. California, meanwhile, recently considered a likely-unconstitutional scheme to impose a wealth tax, then charge a special “exit tax” on taxpayers who tried to leave.
Both states are also known for being aggressive in other areas of their tax codes. Most recently, California and New York became the first states to move towards a plan to subject out-of-state e-retailers to business taxes on the basis of a number of normal website functions, including offering customer service through chat or email. In other words, rather than trying to attract residents who want to live there, New York and California tend to try and catch out-of-state taxpayers up in its tax code through aggressive enforcement.
But it’s easy to see a better way to stem the bleeding. Florida, for example, added $23.6 billion on net to its tax base over the same 2019-2020 tax year period. While the weather is certainly a draw, so too is the state’s tax code, as Florida has no state individual income tax. Other states that gained from tax migration, such as Texas (+$6.3 billion), Arizona (+$4.8 billion), North and South Carolina (+$3.6 billion each), and Tennessee (+$2.6 billion) all rank as having below-average tax burdens according to the Tax Foundation’s metric of state and local tax burdens.
The conclusion is inescapable: taxpayers like low taxes, and don’t like high taxes. If New York and California want to get taxpayers to stop trying to escape, the solution is not to come up with ever-more convoluted schemes to trap them. It’s just to make their tax codes more competitive.
Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.
