Americans Ditched High-Tax States During Pandemic, Study Finds

Feb 05, 2022

Americans moved to states with low or no income taxes during the COVID-19 crisis, reaping savings from their work-from-home flexibility.

"People migrate to regions with low or no-income taxes for a number of causes, the most immediate and evident one being that it decreases their personal tax obligation," Jared Walczak, vice president of state programs at the Tax Foundation's Center for State Tax Policy, said. "That will be of high importance for some, particularly now that individuals can migrate anywhere they wish."

As a Tax Foundation report showed, regions with high-income tax rates witnessed considerable losses of residents, and areas with low taxes witnessed a rapid rise in population.

During the period from April 2020 to July 2021, a decrease of 2.8% was recorded in the District of Columbia's population, while one of the highest-taxed states, New York, lost 1.8% of its people. Hawaii, Illinois, and California followed the lead, all of which have high tax rates. On the contrary, states with little or no personal income taxes had the greatest rise in population, particularly Tennessee, Nevada, New South Dakota, Hampshire, Texas, and Florida. According to Walczak, although pandemic has enabled those with enhanced mobility to make such a move, higher tax rates are not the main motive some have moved.

"Second-order impacts also exist," Walczak noted. "States with lighter rates of taxation and more growth-friendly tax regimes have better rates of growth and more economic potential, and individuals will travel in search of those benefits even if it means going above and beyond their own tax responsibilities."

You may save a lot of money

While low-income states may have better revenue or real estate taxes, the overall tax rate is frequently low. Consider Texas, which has stronger housing taxation than the national average.

"But even so, for most individuals, the mixture of Texas' higher land taxes and lack of income taxes represents large tax savings over most of the states from which they may have relocated," Walczak noted.

In 2021, nine states with increased population approved or adopted changes to individual or business income taxes. At the same time, New York, which saw the greatest population decrease, and Washington, D.C. hiked income taxes in 2021, making them the only jurisdictions to do so.

Local taxes may also increase a person's total tax burden. For example, the researchers discovered that in states that are experiencing population growth, the top marginal rate for state and local income taxes is 3.5%, while the rate is 7.3% for the third of states with the high tax rates.

"I'm one of the persons who is attempting to flee from New York City in order to reduce tax responsibilities," Ramona Cedeo, CPA and founder of FiBrick, an accounting service for technology startups and small enterprises, stated. "New York may be too costly."

She estimates that relocating would save her between 5% and 6% on taxes. People migrating in search of greater economic prospects Because of the flexibility provided by working from home options, a growing proportion of young, working individuals is relocating across state borders.

"Before COVID-19, we remained in these high-tax regions because there was another motivation. My workplace was in New York City, and I had customers in California who expected me to be personally there," Cedeo explained. "You can reside anyplace today. You can operate online, and you don't have to see customers all the time."

Usually, migrations from one state to another are driven by retirees fleeing from colder and higher-tax jurisdictions in search of lower or no-income taxes in states with milder temperatures. It is not the case, according to Walczak.

"This isn't simply a movement of retirees; it's becoming a relocation of individuals searching for better economic possibilities," Walczak concluded, "people migrating or trying to find a job, cheaper housing costs, fewer taxes, and general opportunities."

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