So Long, California. Sayonara, New York
Blue states will lose millions of people in the years to come—and they aren’t ready.
By Arthur B. Laffer and Stephen Moore
April 24, 2018 7:18 p.m. ET
As the Trump tax cut was being debated in December, California’s Gov. Jerry Brown called the bill “evil in the extreme” and fumed that it would “divide the hell out of us.” He’s right—but in the end, this change could be good for all the states.
In the years to come, millions of people, thousands of businesses, and tens of billions of dollars of net income will flee high-tax blue states for low-tax red states. This migration has been happening for years. But the Trump tax bill’s cap on the deduction for state and local taxes, or SALT, will accelerate the pace. The losers will be most of the Northeast, along with California. The winners are likely to be states like Arizona, Nevada, Tennessee, Texas and Utah.
For years blue states have exported a third or more of their tax burden to residents of other states. In places like California, where the top income-tax rate exceeds 13%, that tax could be deducted on a federal return. Now that deduction for state and local taxes will be capped at $10,000 per family.Consider what this means if you’re a high-income earner in Silicon Valley or Hollywood. The top tax rate that you actually pay just jumped from about 8.5% to 13%. Similar figures hold if you live in Manhattan, once New York City’s income tax is factored in. If you earn $10 million or more, your taxes might increase a whopping 50%.
About 90% of taxpayers are unaffected by the change. But high earners in places with hefty income taxes—not just California and New York, but also Minnesota and New Jersey—will bear more of the true cost of their state government. Also in big trouble are Connecticut and Illinois, where the overall state and local tax burden (especially property taxes) is so onerous that high-income residents will feel the burn now that they can’t deduct these costs on their federal returns. On the other side are nine states—including Florida, Nevada, Texas and Washington—that impose no tax at all on earned income.
Last week the two of us, along with co-author Jonathan Williams, released the 11th annual edition of “Rich States, Poor States,” a report published by the American Legislative Exchange Council. The report ranks each state’s economic outlook using a range of variables. One is domestic migration: Are the U-Haul trucks and vans moving people in, or moving them out? Over the past decade, about 3.5 million Americans on net have relocated from the highest-tax states to the lowest-tax ones.
Since 2007 Texas and Florida (with no income tax) have gained 1.4 million and 850,000 residents, respectively, from other states. California and New York have jointly lost more than 2.2 million residents. Our analysis of IRS data on tax returns shows that in the past three years alone, Texas and Florida have gained a net $50 billion in income and purchasing power from other states, while California and New York have surrendered a net $23 billion.
Now that the SALT subsidy is gone, how bad will it get for high-tax blue states? Very bad. We estimate, based on the historical relationship between tax rates and migration patterns, that both California and New York will lose on net about 800,000 residents over the next three years—roughly twice the number that left from 2014-16. Our calculations suggest that Connecticut, New Jersey and Minnesota combined will hemorrhage another roughly 500,000 people in the same period.
Red states ought to brace themselves: The Yankees are coming, and they are bringing their money with them. Meanwhile, the exodus could puncture large and unexpected holes in blue-state budgets. Lawmakers in Hartford and Trenton have gotten a small taste of this in recent years as billionaire financiers have flown the coop and relocated to Florida. As the migration speeds up, it will raise real-estate values in low-tax states and hurt them in high-tax states.
As far as we can see, the only way for blue states to prevent this coming fiscal bloodbath is to start taking tax competitiveness seriously—and to cut their tax rates in response. Progressives should do the math: A 13% tax rate generates zero revenue from someone who leaves the state for friendlier climes.
Blue states ought to be able to lower their taxes and spending dramatically without jeopardizing vital services. Despite its shrinking tax base, New York spends nearly twice as much on state and local government per person ($16,000) as does economically booming Tennessee ($9,000).
Alas, delusional liberal interest groups want blue states to respond to the Trump tax cuts by soaking their rich residents even more. If that happens, our best advice to blue-state residents is simple: Git while the gittin’s good.
Mr. Laffer is chairman of Laffer Associates. Mr. Moore is a senior fellow at the Heritage Foundation. They are co-authors of the ALEC annual report “Rich States, Poor States.”