The U.S. population grew last year at the slowest rate since World War I as the birth rate and immigration declined, the Census Bureau reported last week. Slowing population growth will have significant economic and social implications for the country, but especially for high-tax states.
The Census Bureau and IRS last week also released state population growth and income migration data for 2018 that show the exodus from high-tax to low-tax states is accelerating. Four states have lost population since 2010 including West Virginia (-3.3%), Illinois (-1.2%), Vermont (-0.3%) and Connecticut (-0.2%), but 10 experienced declines last year. New York was the biggest loser as a net 180,000 people left for better climes. Over the last decade New York has lost more of its population to other states (7.2%) than any other save Alaska (8%), followed by Illinois (6.8%), Connecticut (5.6%) and New Jersey (5.5%).
Hmmm, what do these states have in common? Large tax burdens and politically powerful public unions. Illinois’s property tax rates are the second highest in the country after New Jersey. The state lost $5.6 billion in adjusted gross income last year to other states, about twice as much as in 2012. Notably, income outflow hasn’t increased from Michigan or Wisconsin.
Illinois’s 4.95% flat income tax is lower than many of its neighbors, but Democrats are pushing a state constitutional amendment on the November ballot for a progressive income tax. Voters should look how that’s turned out for other high-tax states.
New York’s 12.7% top marginal rate is the second highest in the U.S. In the last two years New York has lost a net $18 billion in adjusted gross income. The wealth exodus is reducing revenue and making it harder to fund programs like Medicaid. As Gov. Andrew Cuomo groused last year, “Tax the rich, tax the rich, tax the rich. We did that. God forbid the rich leave.”
Connecticut was a tax haven in the Northeast before it adopted an income tax in 1991, and Democrats have raised the rate again and again. The 6.99% top rate, which hits individuals making more than $500,000, is now higher than Massachusetts’s 5.1% flat tax and not much of a bargain on New Jersey’s 8.97% “millionaire tax.”
That was New Jersey’s top rate on income of more than $500,000 before Democrats in 2018 imposed a 10.75% surtax on folks making more than $5 million. But the state is still short on revenue to pay government pensions, so Democratic Gov. Phil Murphy wants to extend the 10.75% top rate to income above $1 million.
Then there’s California, where the 13.3% top rate on individuals making more than $1 million is the nation’s highest. Democrats in the Golden State have long proclaimed that raising taxes on the rich won’t make them leave and they flog old data showing that more high earners moved into the state than left.
No more. The exodus of high earners has accelerated since voters approved a referendum in 2012 raising the top rate on income above $250,000. The ratio of tax returns over $200,000 moving into and out of the state was then about equal. Now the ratio is about three to two and is higher than for middle and lower earners.
Last year California lost $8 billion in adjusted gross income to other states, up from about $135 million in 2012. Much of this is higher capital-gains income earned by the affluent. High housing costs, diminished economic opportunities and lousy public schools in California and other liberal states have also sent young workers and middle-class families packing.
Since 2010, California, New York and Illinois have experienced the largest population declines among people under age 18, though New Jersey and Connecticut also rank high. Fewer young workers will make it harder to keep state economies growing to pay for government entitlements and pensions.
Where are high-tax state exiles going? Zero income tax Florida drew $16.5 billion in adjusted gross income last year. Many have also fled to Arizona ($3.5 billion), Texas ($3.5 billion), North Carolina ($3 billion), Nevada ($2.3 billion), Colorado ($2.1 billion), Washington ($1.7 billion) and Idaho ($1.1 billion). Texas, Nevada and Washington don’t have income taxes.
Democrats in high-tax states blame the 2017 tax reform, which limited the federal deduction for state and local taxes to $10,000 and thus increased the effective federal tax rate for the well-to-do. The cap took effect in 2018, but most taxpayers would not have felt the pain until they paid their taxes last year. Taxpayer flight may accelerate even more now.
All of this explains why Democrats are nervous about the 2020 Census, which will decide apportionment of House seats and electoral votes for the next decade. California, Illinois and New York are each projected to lose a seat while Texas is forecast to pick up three, Florida two and Arizona one.
We know progressives believe in redistribution, and it’s kind of Democrats to spread their wealth and political power to other states.