While many are already examining the near-term effects of the tax reform passed a few months ago, could it have larger implications for where people choose to live in the long run? In a recent Wall Street Journal op-ed, a pair of economists posits that changes instituted by the tax reform bill will ultimately drive millions of people out of blue states such as California and New York and into low-tax red states.
As economists Arthur B. Laffer and Stephen Moore, authors of the annual “Rich States, Poor States” report published by the American Legislative Exchange Council, explain, this migration from high-tax states to low-tax states is nothing new, but they argue that the tax reform bill—and specifically its cap on SALT deductions—is likely to accelerate this trend. According to Laffer and Moore, “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.”
According to Laffer and Moore’s “Rich States, Poor States” report, around 3.5 million Americans have relocated from the highest-tax states to the lowest-tax ones over the past decade. Since 2007, the report finds that Texas and Florida (states that do not have an income tax) have seen an influx of 1.4 million and 850,000 residents, respectively. California and New York have lost more than 2.2 million residents combined within that same period.
Laffer and Moore say that, based on an analysis of IRS record for that decade, “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.”
The tax reform bill capped SALT deductions at $10,000 per family, which could mean a significant tax increase for high earners in higher-taxed states, according to the economists. “Consider what this means if you’re a high-income earner in Silicon Valley or Hollywood,” states the op-ed. “The top tax rate that you actually pay just jumped from about 8.5 percent to 13 percent. 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 percent.”
Laffer and Moore estimate that the lowering of the SALT deductions will result in California and New York losing around 800,000 residents, on net, during the next three years. They expect Connecticut, New Jersey, and Minnesota to lose around 500,000 residents combined during that period as well.
Of course, the tax issue will be more of a problem for some economic tiers than for others. Nor are tax rates the only factor driving migration. A November 2017 Redfin study found that residential construction was a major driver of intercity and interstate migration—not surprising, given that many American markets are suffering from not only skyrocketing home prices but also insufficient housing inventories. Like the movie said: if you build it, they will come.
If the taxes are lower, Laffer and Moore believe that they’ll come in droves. If so, that large-scale migration will undoubtedly have major impacts on the housing markets involved. Especially given that many markets in California, for instance, are already facing severe housing crises due to affordability and inventory issues. Higher taxes might just be the extra push some homeowners need to decide to relocate.