Moving to a low-tax state can be an expensive way to save money

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Do people really move because they think their income taxes are too high? It’s a long-standing debate. Finally, a recent Tax Foundation report provides compelling evidence that yes, they do.

The right-wing group analyzed data from the Internal Revenue Service that compares the addresses of tax returns filed for the 2018 and 2019 tax years. These are returns that were sent to the IRS from 2019 through to July 15, 2020 (because taxpayers got a three-month extension during the pandemic for their 2019 returns).

It’s one of the most comprehensive data I’ve seen covering relatively recent moves – encompassing some 150 million taxpayers who have filed, along with their adjusted gross incomes.

The Tax Foundation focused on three categories: top marginal personal income tax rates, the structure of the tax code, and state and local tax collections per capita – in other words, a state’s total tax chest (income tax plus other taxes like property tax and sales tax collected) divided by population.

Under all three measures, the states with the largest net taxpayer inflows were low-tax states. They had among the lowest top marginal rates, below-average state and local tax collections, and what the foundation considers “well-structured” tax codes. While many factors can influence a person to move, taxes seem to be part of the decision for many, with zero-tax or low-tax states always being the biggest winners.

Notably, seven of the 10 states that saw the largest taxpayer gains had either zero income tax or top rates below the national median during the period. Today, nine of those states either have no income tax, a flat income tax, or are planning to adopt one. Similarly, the states with the largest net taxpayer losses were all states with relatively high tax burdens: New York, California, Illinois, Massachusetts, and New Jersey. I wouldn’t do that myself, but hey, I live in one of those high-tax states.

Focusing on the highest-earning taxpayers, or those with taxable income of at least $200,000, shows that the top three places to move to were Florida, Texas and Arizona. Florida and Texas have no state income tax, and Arizona plans to move to a flat-rate personal income tax next year.

Are these moves short-sighted? After all, when other taxes are factored in, such as property, sales, and excise taxes, Texas and Arizona fall pretty much in the middle of the pack. And wages in New York, California, Massachusetts, and New Jersey tend to be higher than incomes in low-tax states.

Katherine Loughead, senior policy analyst at the Tax Foundation who authored the report, agrees that state income tax seems to dictate movers’ decisions more than any other tax. Even if taxpayers complain about property taxes, they are more likely to directly feel the benefit of paying higher property taxes, for example for good public schools, than they are with high tax rates. However, there are outliers. South Carolina was 5th in attracting high net worth taxpayers, but still imposes a progressive personal income tax rate capping at 7%. Virginia lost top earners despite a relatively unremarkable top marginal rate of 5.75%.

No one likes feeling like they’re the victim of a bad deal, especially when it comes to the taxman, but focusing too narrowly on avoiding income tax can backfire. Just ask transplants from New York to Florida to deal with the costly aftermath of Hurricane Ian.

More from Bloomberg Opinion:

• Some Unsolicited Recession Survival Advice for Gen Z: Erin Lowry

• Savers, now is the time to choose an online bank: Alexis Leondis

• Take advantage of the Social Security bump now. You’ll Pay Later: Allison Schrager

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Alexis Leondis is a Bloomberg Opinion columnist covering personal finance. Previously, she oversaw tax coverage for Bloomberg News.

More stories like this are available at bloomberg.com/opinion

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