Are The Wealthy Leaving Blue States For Red Ones?

// There is buzz about a report from MyElistings.com which concluded that high earners are leaving high-tax states in favor of those states with little or no income taxes.

The report extracted state-by-state tax migration data, focusing specifically on high-income earners as defined by IRS parameters. Net income migration for each state was calculated by subtracting out-migrants’ total income from in-migrants’ total revenue. The report sourced data from the Internal Revenue Service’s Statistics of Income Tax Stats – Migration Data.

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According to the report, California, New York, and Illinois showed the most net negative outflow of wealth, focusing on high-income taxpayers. California lost $343.2 million, New York lost $299.6 million, and Illinois lost $141.7 million. On the other hand, Florida, Texas, and Arizona showed the highest positive inflow of wealth, with Florida gaining $12.4 billion, Texas gaining $10.7 billion, and Arizona gaining $9.4 billion.

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This has led some commentators to believe that the wealthy are leaving progressive high-tax states for more conservative and tax-friendly states. But is this really the case?

Some perspective is in order. While the net income losses described above in California, New York, and Illinois sound high, total tax revenues in these states are much higher, so the loss may not be significant. For example, even if California lost $342.2 million in income as the report claims, that income is at most taxed at 13.3%. Assuming a simple average tax rate of 10%, the loss translates into a tax revenue loss of $34.2 million. Compare this to revenue from California’s personal income taxes in 2022 which totaled over $130 billion. It is not clear how their departures have affected state sales tax revenue although the total revenue from last year’s sales taxes was over $32 billion.

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There are stories of high-net-worth businesses and individuals leaving high-tax states. The most notable is Tesla, which moved its headquarters from California to Texas in 2021 although thousands of its employees still work in California.

The thinking is that wealthy people are essential to the economy because they are usually business owners who have employees. If they leave, the employees will also leave or will be laid off. This leads to less tax revenue and possibly money spent on giving unemployment benefits. If this happens on a massive scale, then a city’s economy could crash.

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But it is not easy for most wealthy people to simply pack their bags and move to a state that is more tax friendly. If a business in one state has customers or clients in that state, it would probably be inefficient to move to a new state where it may have to start from scratch.

Also, most people are not going to leave just because they don’t agree with the state’s politics so long as they are not directly affected by those politics. If the wealthy are living comfortably, they are more likely to stay. Businesses will simply pass on the higher taxes to their customers.

High-tax states are generally more desirable places to live due to culture, climate, and food. These states know this and believe that for every person who leaves, someone from another state or country will gladly take their place and pay the higher taxes. Unfortunately, the recent uptick in crimes in more progressive cities could change that long-held thinking.

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But overall, New York and California have suffered huge revenue losses in recent years. According to CNBC, new data from the Internal Revenue Service shows that New York state lost $25 billion in adjusted gross income due to outmigration in 2021, on top of $20 billion lost in 2020. California reported a net loss of $29 billion in 2021, following a loss of $18 billion in 2020. Combined, the two states lost $92 billion across the two years.

Conservative states like Florida and Texas stand to gain tax revenue from sales or property taxes as a result of the net positive wealth migration. While these states can claim this as an ideological win, they should know that the people coming from progressive states are likely to bring their ideology with them and vote accordingly.

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While the report states that some wealthy people are moving to states with lower taxes, the move is not likely to have a significant effect on a state’s budget or its economy. For various reasons, most wealthy people in high-tax states want to stay there. But if the quality of life in high-tax states starts to decrease, the wealthy will seriously ponder what their tax dollars are paying for.

Steven Chung is a tax attorney in Los Angeles, California. He helps people with basic tax planning and resolve tax disputes. He is also sympathetic to people with large student loans. He can be reached via email at [email protected]. Or you can connect with him on Twitter (@stevenchung) and connect with him on LinkedIn.

Topics

Government, Steven Chung, Tax Law