Pandemic Intensifies State Tax Competition to Attract Businesses and Residents

Tax competition between states to attract and retain businesses and residents has been going on for decades. The pattern of national migration has generally evolved from cold, high-tax northern states to warm, low-tax states in the south and southwest.

Retirees, who are no longer tied to a workplace or raising children, have been an important part of the caravan of migrants heading south. However, for all but the richest, taxes are usually not the primary factor.

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

The icing, however, is becoming the cake itself for a wide range of Americans. With tax rates likely to rise, state income, property and sales taxes become more important factors for individuals and business owners when deciding where to live and work .

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Losi has received a wave of calls since November from high net worth clients – especially business owners – about the possibility of moving to a low-tax state.

“I’m not talking about the elderly,” he said. “These are people who will earn an income for another 20 to 30 years.

“They see their states continuing to raise taxes on income and businesses and are therefore seeking to migrate elsewhere,” he added.

While taxes are not the only problem driving migration patterns, they clearly need to be considered.

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

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

“High tax states are under more pressure now than they have been in a 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 over the past year was adding to the pressure.

“The growth of the remote working environment is an extremely important development,” he said. “People and businesses are increasingly able to choose where they want to locate.”

Most experts expect more people and businesses to choose to locate where they can pay less tax. The moves of big tech companies like Oracle and Hewlett Packard from Silicon Valley from California to Texas are just the most prominent examples. Any business capable of operating remotely now takes its tax footprint more seriously.

“If a business is large enough with offices across the country, it can assign people working remotely to offices in low-tax states,” Walczak said. “I think a lot more companies will want to offer their employees friendly conditions remotely.”

This prospect likely keeps many state tax administrators from sleeping at night. Six states, including Connecticut, New York, and Pennsylvania, have so-called “convenience” rules that allow them to tax employees of companies located in the state even if they do not live or work in the state. ‘State.

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

The problem of remote work is likely to cause further conflict between state tax authorities. This will certainly challenge high tax states that envision a faster eroding tax base.

“High-tax states are like aircraft carriers – they spin slowly,” Losi said. “If they see more migration, they will have shortages of income and more difficulty financing their bonds. These states are in big trouble.”

At the moment, many are doing better than expected financially. Much of this is due to federal coronavirus relief programs, especially enhanced unemployment benefits that are taxable by the states, and healthy tax revenues from property and capital gains from the still real estate and stock market. booming, Walczak said. Forty-two states tax capital gains.

He suggests that high-tax states don’t overreact if more residents start leaving the state.

“If they raise taxes on those who stay, it could be a self-fulfilling prophecy ensuring more people leave,” he said. “California and New York don’t need a Florida or Texas tax code to compete for residents and businesses, but they can’t go in the opposite direction.”