If you’re still wondering why raising the cap on the State and Local Tax (SALT) deduction was important enough to Democrats to sacrifice their stated principles and resort to brazen gimmicks in order to fit it into the reconciliation bill, look no further than the latest release of the IRS’s tax migration data, covering tax years 2018-2019.
The data shows that certain states continue to alienate their own tax bases with punitively high taxes and uncompetitive business tax environments. High-tax states are losing taxpayers at an alarming rate, while states that tax their residents less aggressively are benefiting from their fellow states’ loss.
The five states that lost the most taxpayers are not exactly known for fiscal restraint. New York, California, Illinois, New Jersey, and Massachusetts lost, on net, 219,937 taxpayers and over $28 billion in adjusted gross income (AGI). On average, these states have a state-local effective tax rate of 11.8 percent.
The five states that gained the most taxpayers, on the other hand, are all low-tax states — in fact, three of the five have no state income tax. Florida, Texas, Arizona, North Carolina, and Washington state gained, on net, 194,340 taxpayers and $28.9 billion in AGI, all while averaging a state-local effective tax rate of just 8.96 percent. Unsurprisingly, Florida is the big winner here, adding $17.5 billion in AGI to its tax base alone.
But this phenomenon of taxpayers fleeing states that treat them like boundless sources of tax revenue is nothing new, and high-tax states aren’t learning their lessons anytime soon. Since the tax years covered by this data, New Jersey and New York have passed major income tax increases, while the other three states that lost the most taxpayers are seriously considering doing the same.
And even with never-ending tax increases, many of these states are in dire fiscal straits. Illinois, New Jersey, and Massachusetts stand out for their poor fiscal outlook due to debt and unfunded pension liabilities.
If you’re thinking that these states should consider cutting back on spending rather than blissfully continuing down this death spiral, you wouldn’t fit in well among their policymakers. Instead, they’re counting on a reinstituted SALT deduction to pass the tax burden they place on their residents onto taxpayers elsewhere.
Of the 10 counties that saw the largest benefit from the SALT deduction before it was capped, nine are in the five states that suffered the greatest net loss of taxpayers (the other is in Connecticut, which lost the 11th most taxpayers on net). These 10 counties lost, on net, over 35,000 taxpayers and $10.4 billion in AGI between 2018 and 2019, after the SALT deduction was capped.
It’s easy to see, then, why high-tax states view the capping of the SALT deduction as an existential threat. Without the ability to write off their high state and local taxes on their federal tax returns, residents there face the full brunt of the tax burden imposed by the state.
However, that’s far more of an indictment of the tax policies of high-tax states than it is a reason to reinstate the full SALT deduction. Tax liabilities reduced by the SALT deduction necessarily result in either higher taxes for other taxpayers or greater accumulation of debt. Either way, average taxpayers elsewhere pay.
Instead of counting on the federal government to bail them out, states with uncompetitive tax structures should look inwards. When residents don’t feel like the taxes they pay are fair or reasonable, they leave for a state with more reasonable tax burdens. If high-tax states want to keep their residents, they need to recognize that fact.
Originally published by RealClearMarkets. Republished with permission.
