Pandemic heats up state tax competition to attract businesses and residents

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The tax competition between states to attract and maintain businesses and residents has been ongoing for many years. The nationwide migration sample has usually trended from chilly, high-tax northern states to heat, low-tax southern and south western states.

Retirees, not tied to a office or elevating kids, have been a significant a part of the caravan of migrants heading south. However, for all however the wealthiest, taxes are often not the principle issue.

“I think for most retirees who move, it’s about quality of life,” stated Ryan Losi, a CPA with Piascik based mostly in Richmond, Virginia. “The [lower] taxes are the icing on the cake for them.”

The icing, nevertheless, is changing into the cake itself for a broader swath of Americans. With tax charges doubtless to rise, state earnings, property and gross sales taxes have gotten larger components for each people and enterprise house owners in deciding the place to stay and work.

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Losi has had a surge of calls since November from rich shoppers — significantly enterprise house owners — to speak about probably shifting to a low-tax state.

“I’m not talking about seniors,” he stated. “These are people who will be earning income for another 20 to 30 years.

“They see their states persevering with to enhance earnings and enterprise taxes so that they’re wanting to migrate elsewhere,” he added.

While taxes are not the sole issue driving migration patterns, they are clearly a consideration.

Last year, the five states with the biggest proportionate outbound migration were California, Connecticut, Illinois, New Jersey and New York, according to the 2020 National Movers Study published annually by United Van Lines.

Four of those five states were ranked in the bottom five for business tax climate in 2021 by the Tax Foundation. Illinois ranked 36th.

“High-tax states are underneath extra strain now than they have been in a very long time,” said Jared Walczak, vice president of state projects for the Tax Foundation. He said the pandemic and the generally positive remote working experience of millions of Americans in the last year is adding to the pressure.

“The progress of the distant working surroundings is a particularly massive improvement,” he said. “People and businesses are more and more in a position to select the place they need to find.”

Most experts expect more people and businesses will choose to locate where they can pay lower taxes. The moves of big-name tech companies like Oracle and Hewlett Packard from California’s Silicon Valley to Texas are only the most prominent examples. Any business capable of operating remotely is now likely considering its tax footprint far more seriously.

“If an organization is sufficiently big with places of work throughout the nation, it might assign folks working remotely to places of work in low-tax states,” Walczak said. “I feel much more businesses will need to supply workers remote-friendly circumstances.”

That prospect likely keeps many state tax administrators up at night. Six states, including Connecticut, New York and Pennsylvania, have so-called “comfort” rules that enable them to tax employees of businesses located in the state even if they don’t live or work in the state.

Massachusetts, which has a personal income tax rate of 5%, instituted such a rule last year in response to the pandemic. It is currently being sued by the state of New Hampshire, which has no income tax and has attracted many remote workers from Massachusetts.

The remote work issue is likely to cause more conflict between state tax authorities. It will certainly challenge high-tax states looking at a more rapidly eroding tax base.

“High-tax states are like plane carriers—they flip slowly,” Losi said. “If they see extra migration, they will have income shortages and extra problem funding their obligations. These states are in serious trouble.”

For the time being, many are doing better financially than expected. In large part, that’s due to the federal coronavirus relief packages, particularly the enhanced unemployment benefits that are taxable by states and the healthy property and capital gains tax revenue from the still buoyant real estate and stock market, said Walczak. Forty-two states tax capital gains.

He suggests that high-tax states not overreact if more residents begin leaving the state.

“If they elevate taxes on those that stay, it might be a self-fulfilling prophecy making certain extra folks depart,” he said. “California and New York do not want a Florida or Texas tax code to compete for residents and businesses, however they cannot be moving into the other way.”

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