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

Are people really moving because they feel their state taxes are too high? It has been a long debate. Finally, a recent report from the Tax Foundation provides compelling evidence that they do.

The right-wing group analyzed data from the tax authorities comparing addresses for tax returns from tax years 2018 and 2019. These are returns sent to the tax authorities from 2019 through July 15, 2020 (because taxpayers have a three-month extension during the pandemic for their return in 2019).

It’s some of the most comprehensive data I’ve seen on relatively recent moves — about 150 million taxpayers who filed returns, along with their adjusted gross income.

The Tax Foundation focused on three categories: the highest marginal individual 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 coffers (income tax plus other taxes such as property taxes). and sales tax collected) divided by population.

Under all three measures, the states with the largest net inflow of taxpayers were states with lower taxes. They had one of the lowest marginal rates, below-average state and local tax collections, and what the foundation considers “well-structured” tax codes. While many factors can drive a person to move, for many, taxes seem to be part of the decision, with no- or low-tax states consistently being the biggest winners.

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

Looking at higher-income taxpayers, or those with taxable incomes of at least $200,000, shows that Florida, Texas and Arizona were the top three favorite places to move to. Florida and Texas have no income taxes, and Arizona plans to move to a flat-rate individual income tax next year.

Are these moves shortsighted? After all, when other taxes are taken into account, such as real estate, sales, and excise taxes, Texas and Arizona are more mediocre. And salaries in New York, California, Massachusetts, and New Jersey tend to be higher than incomes in the lower-tax states.

Katherine Loughhead, a senior policy analyst at the Tax Foundation who wrote the report, agrees that the state income tax seems to determine movers’ decision more than any other tax. Even if taxpayers grumble about property taxes, they are more likely to feel the immediate benefit of paying higher property taxes, for example for good public schools, than with high income tax rates. However, there are outliers. South Carolina was No. 5 for attracting wealthy taxpayers, but it still imposes a tiered individual income tax rate capped at 7%. Virginia lost high earners despite a relatively common marginal rate of 5.75%.

No one likes feeling like they’re getting a rough deal, especially when it comes to the IRS, but focusing too closely on avoiding income taxes can backfire. Just ask New York transplants in Florida dealing with the costly aftermath of Hurricane Ian.

More from Bloomberg Opinion:

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• Savers, it’s time to choose an online bank: Alexis Leondis

• Enjoy the Social Security Bump now. You pay later: Allison Schrager

This column does not necessarily reflect the views of the editors or Bloomberg LP and its owners.

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

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

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