Susan Button doesn’t call herself a tax refugee but that is precisely what this mother of four was when she moved from New York state to a town in rural Pennsylvania last year.
Having lived in New York, one of the highest taxing states in the US, the now-retired single mother was increasingly angered by how much more she was spending on everything. So last August she packed up and moved across the border, where state taxes were much lower.
“It’s definitely cheaper to live here,” she tells Inquirer from her new rural mountain home in northern Pennsylvania. “Not only was the more than 8 per cent sales tax (a combination of state and local sales tax) on necessary goods such as clothing burdensome but this sales tax on repairs — appliance repair, car repairs — it counted up. Imagine purchasing a new refrigerator for $US800 ($1030) plus a sales tax of over $US64 extra? I knew large families who drove over the state line to Pennsylvania to purchase their kids’ school clothes just to avoid the sales tax.”
Button is not alone. More and more, Americans are voting with their feet to flee high-taxing states for states with lower taxes. It’s a phenomenon that is tipped to accelerate after Donald Trump’s recently passed tax reform package removed key deductions for those living in high-tax states such as California, New York and New Jersey, making it even more expensive to live there.
Unlike Australia, US states can set their own levels for all their taxes, including state income tax (levied in addition to federal income tax), property taxes and sales tax. This leads to sometimes vastly different levels of state income tax. For example, California has a top marginal personal income tax of 13.3 per cent, New York has 12.7 per cent and Florida and Texas have no income tax.
But what now makes this issue so politically sensitive is that the tax flight across the US has become a virtual one-way flow — from high-taxing Democrat states to low-taxing Republican states.
As such, it has become part of the ideological war between the right and left as Democrats try to dispute the trend and Republicans try to tout it as proof that low-tax regimes are the way of the future.
“It is one of those arguments that should not be ideological; it should be about what is working and what is not working,” Jonathan Williams, chief economist for the Centre of State Fiscal Reform, tells Inquirer.
“There is no doubt that states that are keeping their taxes low and have a more free-market outlook are the states that are winning — people are voting with their feet and with their wallets by moving to states with lower taxes.”
For the past decade Williams, along with fellow conservative economists Stephen Moore and Ronald Reagan’s former economic adviser Arthur Laffer, have tracked migration flows and paired them with state tax levels and other economic factors.
They found that from 2006 to 2015, the biggest net migration losses were from high-taxing states such as New York (1.38 million), California (1.1 million), Illinois (690,000), Michigan (593,000) and New Jersey (525,000). Each of these are high-tax Democrat states, except for Michigan, which narrowly voted for Trump in 2016.
By contrast, the states with the biggest net inflow of people were Texas (1.47 million), Florida (779,000), North Carolina (609,000), Arizona (450,000) and Georgia (378,000). Each of these are low-taxing Republican states.
“It is getting harder and harder every year for those apologists for high-taxing states to rationalise their point of view, given the overwhelming amount of data in the direction of free-market policy,” says Williams.
This data is backed by that collected by the large US removal companies including U-Haul and North American Moving Services, which produce annual reports on the migratory habits of their clients. North American Moving Services’ US Migration Report for 2017 shows the top five inbound states for household moves were Arizona, Idaho, North Carolina, South Carolina and Tennessee, while the top five outbound states were Illinois, Connecticut, New Jersey, California and Michigan.
All five top inbound states are Republican while all of the top outbound states are Democrat, with the recent exception of Michigan.
“The evidence suggests that Americans are moving from states that are relatively more economically stagnant, Democrat-controlled, fiscally unhealthy states with higher taxes, more regulations and with fewer job opportunities to Republican-controlled, fiscally sound states that are relatively more economically vibrant, dynamic and business friendly, with lower tax and regulatory burdens and more economic and job opportunities,” says Mark Perry, economics professor at the University of Michigan.
In financial terms, the most recent data also shows a wealth flow from high-tax states to low-tax states. Between 2012 and 2015, Illinois lost $US13.6 billion in adjusted gross income, while New Jersey lost $US8.5bn and Connecticut lost $US6.2bn. Meanwhile, Florida gained $US39.3bn.
Democrats and sceptics do not deny these migratory trends but they say it is disingenuous to credit them to lower taxes, pointing out that there are many reasons people move interstate and that taxes are not at the top of the list.
Cristobal Young, author of The Myth of Millionaire Tax Flight, argues that the common belief that millionaires are migrating across the US to find lower taxes is overstated. “Almost all of the tax-migration moves (involving millionaires) are just to one low-tax state: Florida, where low income taxes commingle with sun, sand and palm trees,” she writes.
Others argue that the shift in population from America’s cold, industrial northeast to the wider spaces and better climates of the south is a broader demographic trend that has been under way for some time and cannot be attributed primarily to tax. They argue that people mostly move state for reasons other than tax, such as for jobs and economic opportunity, for family and lifestyle reasons, or to set up a business.
Williams counters that tax rates also affect some of these factors, including job prospects, economic opportunity and business viability.
At a broader level, critics say tax competition between the states is unhealthy for the country because it leads to a “race to the bottom”. This, they say, inevitably leads to a shortage of state revenue to provide basic community services and infrastructure that people expect of a state government.
But Joel Griffith, director of tax policy with the American Legislative Exchange Council, says low-tax states are not only cheaper to live in but provide more economic opportunity, which is why they are attracting more people.
“Academic data suggests the most harmful tax are taxes on capital and income,” he says. “Property taxes and sales tax might not have the same direct impact but those kinds of taxes certainly influence where a person wants to settle down.”
“For instance, the typical house cost in New Jersey is about the same as in many areas of Colorado, but the property tax burden for that same house can be up to four times as much in New Jersey.”
Griffith dismisses the claim that climate, rather than taxes, is driving migration patterns within the US. “We have seen a lot of people leaving California — a beautiful state with beautiful beaches — to move to places like Nevada, Arizona and Texas.”
The Trump tax reforms are expected to encourage this movement from high-tax to low-tax states. The reform bill caps deductions for state and local taxes at $US10,000, a move that will hit wealthy taxpayers in California, New York, Illinois and New Jersey. Ironically, this has led governors and Democrats in those states — who have long denied any link between tax rates and migration between states — to concede there is a link.
“People with higher incomes pay a lot more money, and some of them may be tempted to leave,” Californian Governor Jerry Brown said last month after Washington passed the tax package. “This was an assault by Republicans in congress against California.”
The fear of a so-called millionaire exodus is especially high because in California the wealthiest 1 per cent pay 48 per cent of income tax, so even a handful of rich families leaving could have a disproportionate impact on the state’s coffers.
“The new state law is kind of like icing on the cake for some who were thinking about moving out of the state,” Californian state Democrat Fiona Ma says. “If they don’t have to stay here because of work or family, it doesn’t give them a lot of incentive.”
New York Governor Andrew Cuomo has also warned that the tax reforms could lead wealthy New Yorkers to flee the state.
“People will take a certain amount of abuse and then there is a point,” he says. “The question is: what is that point? Nobody knows for sure, but you don’t want to reach that point.”
In New Jersey, the Democratic president of the state Senate, Steve Sweeney, has warned against introducing a “millionaire’s tax” in the state because “we can’t afford to lose thousands of people”.
“You know, 1 per cent of the people in the state of New Jersey pay about 42 per cent of its tax base,” he says. “And you know, they can leave.”
Williams says tax-driven migration between states is also contributing to the broader changes in the political demographics of the US. The population shifts are leading to fewer House of Representative seats for high-taxing states and more for lower taxing states.
“The 2017 census estimates provide a clear manifestation of how states with competitive, free-market policies continue to win the day,” he says.
For tax refugee Susan Button, it came as a surprise to learn she is not the only one in her small community who moved across the border for tax relief.
“Here in the Pocono Mountains of northeast Pennsylvania, I understand there are other families who have relocated here from New York and New Jersey (because of) the high cost of living in those states,” she says.
“It’s sad because New York is one of the most beautiful states. Niagara Falls, the Finger Lakes, the impressive Adirondack Mountains — I still miss seeing those.”
Cameron Stewart is The Australian’s Washington correspondent and also US contributor for Sky News Australia.
Reprinted with permission from The Australian.