Tax Policy and Interstate Migration

October 5, 2018 by Dan Mitchell @ International Liberty
 

Back in April, I chatted with Stuart Varney about how some states were in deep trouble because they were being squeezed by having to finance huge unfunded liabilities for bureaucrats, yet they were constrained by the fact that taxpayers have the freedom to move when tax burdens become excessive
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I now have a reason to share the interview because Chris Edwards described this phenomenon of tax-driven migration in a new column for the Daily Caller.

New Jersey’s richest person, David Tepper, moved with his hedge fund business to Florida in 2016. That single move cost the state of New Jersey up to $100 million a year in lost income taxes. Yet, this year, New Jersey’s Democratic governor Phil Murphy hiked the top income tax rate from 8.97 to 10.75 percent. Murphy wanted to raise revenue, but the hike won’t do if it prompts more of the rich to leave. The top 1 percent in New Jersey pay 37 percent of the state’s income taxes. Connecticut is also losing its wealthiest residents after tax hikes by Democratic governor Dan Malloy. In recent years, the state has lost stock trading entrepreneur Thomas Peterffy (worth $20 billion), executive C. Dean Metropoulos ($2 billion), and hedge fund managers Paul Tudor Jones ($4 billion) and Edward Lampert ($3 billion). Those folks all fled to Florida, which has no income tax or estate tax. …High taxes are driving the wealthy out of California. Ken Fisher moved Fisher Investments from California to Washington state, which also has no income tax. The billionaire said he wanted a lower-tax location for his 2,000 employees. Mark Spitznagel moved his Universal Investments from California to Florida, saying that “Florida’s business-friendly policies, which are so different from California’s, offer the perfect environment for this.” The “tax freedom exodus” will accelerate in the wake of the 2017 federal tax law. The law capped the deduction for state and local taxes, which subjected 25 million mainly higher-income households to the full tax burden imposed in high-tax states.

It’s important to ask, though, whether these moves are a trend or just random.

In a more detailed study he produced, Chris crunched that national data and found there is a relationship between tax burdens and migration patterns.



It’s not a perfect relationship, of course, since there are many factors that might lead households to move across state lines.

But tax is definitely part of the equation, especially since high-tax states no longer receive a big indirect subsidy from Uncle Sam.

A column in the Wall Street Journal explores this aspect of the issue.

…real-estate professionals say they are beginning to see early signs of an exodus to low-tax states. “I’ve seen a huge increase in the number of clients who want to purchase in Palm Beach to establish residency in Florida,” says Chris Leavitt, director of luxury sales at Douglas Elliman Real Estate in Palm Beach. …Real-estate developer David Hutchinson, president of Ketchum, Idaho-based VP Cos., is touting the tax advantages of living in Nevada on his company website… The border between California and Nevada bisects Lake Tahoe. Californians to the west can pay a state income-tax rate of up to 13.3%, while Nevada residents just 30 minutes to the east pay no state income taxes.

A Democratic political consultant warns that his party could be hurt.

With state deductions now capped at $10,000, the cost of living in states such as California and New York – where state taxes are notoriously high – is increasing substantially. This has the potential to lead both middle-class families, and even the wealthy, to begin questioning whether it is time to move to a more tax-friendly state. …In one high-profile example of the impact of high taxes, professional golfer Phil Mickelson recently slammed California’s taxes and threated to leave the state. “If you add up all the federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate’s 62, 63 percent,” Mickelson said. …New York Gov. Andrew Cuomo – seeking re-election this year and a potential 2020 Democratic presidential contender – recognizes the threat that tax migration may pose. “If you lose the taxpayers, you lose the revenue,” Cuomo said in December.

Though maybe it would be better for Governor Cuomo to say “lost the revenue.”

Here’s another chart from Chris Edwards’ study. The light-blue states are attracting the most new residents (i.e., taxpayers) while the bright-red states (like New York) are losing the most residents (former taxpayers).



Needless to say, the states with better tax policy tend to be net recipients of taxpayers, and taxable income.

In closing, it’s important to understand that tax-motivated migration also exists between countries.

Here are some excerpts from a column in the New York Times.

When a country begins to fall into economic and political difficulty, wealthy people are often the first to ship their money to safer havens abroad. The rich don’t always emigrate along with their money, but when they do, it is an even more telling sign of trouble. …In a global population of 15 million people each worth more than $1 million in net assets, nearly 100,000 changed their country of residence last year. …In 2017, the largest exoduses came out of Turkey (where a stunning 12 percent of the millionaire population emigrated) and Venezuela. As if on cue, the Turkish lira is now in a free fall. There were also significant migrations out of India under the tightening grip of its overzealous tax authorities… Millionaire migrations can be a positive sign for a nation’s economy. The losses for India, Russia and Turkey were gains for havens like Canada and Australia, joined lately by the United Arab Emirates. …Millionaires move money mainly out of self-interest, to find more rewarding or safer havens. There aren’t a lot of them, but they can tell us a great deal about what is going wrong — and right — in a country’s economic and political ecosystems. Leaders who create the right conditions to keep millionaires home will find that all of their residents — not just the wealthy ones — are richer for it.

I like footloose millionaires because – as discussed in the article – they act as canaries in the coal mine. When they start moving, that sends a helpful signal to the rest of us.

And I also cheer migrating millionaires since they can cause big Laffer-Curve effects. And that puts an external constraint on the greed of politicians.

Which helps ordinary taxpayers like you and me since politicians generally use higher tax burden on the rich as a softening-up tactic before grabbing more money from the masses.