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Posts Tagged ‘Migration’

Back in April, I chatted with Stuart Varney about how some states were in deep trouble because they were being squeezed by having to finance huge unfunded liabilities for bureaucrats, yet they were constrained by the fact that taxpayers have the freedom to move when tax burdens become excessive.

I now have a reason to share the interview because Chris Edwards described this phenomenon of tax-driven migration in a new column for the Daily Caller.

New Jersey’s richest person, David Tepper, moved with his hedge fund business to Florida in 2016. That single move cost the state of New Jersey up to $100 million a year in lost income taxes. Yet, this year, New Jersey’s Democratic governor Phil Murphy hiked the top income tax rate from 8.97 to 10.75 percent. Murphy wanted to raise revenue, but the hike won’t do if it prompts more of the rich to leave. The top 1 percent in New Jersey pay 37 percent of the state’s income taxes. Connecticut is also losing its wealthiest residents after tax hikes by Democratic governor Dan Malloy. In recent years, the state has lost stock trading entrepreneur Thomas Peterffy (worth $20 billion), executive C. Dean Metropoulos ($2 billion), and hedge fund managers Paul Tudor Jones ($4 billion) and Edward Lampert ($3 billion). Those folks all fled to Florida, which has no income tax or estate tax. …High taxes are driving the wealthy out of California. Ken Fisher moved Fisher Investments from California to Washington state, which also has no income tax. The billionaire said he wanted a lower-tax location for his 2,000 employees. Mark Spitznagel moved his Universal Investments from California to Florida, saying that “Florida’s business-friendly policies, which are so different from California’s, offer the perfect environment for this.” The “tax freedom exodus” will accelerate in the wake of the 2017 federal tax law. The law capped the deduction for state and local taxes, which subjected 25 million mainly higher-income households to the full tax burden imposed in high-tax states.

It’s important to ask, though, whether these moves are a trend or just random.

In a more detailed study he produced, Chris crunched that national data and found there is a relationship between tax burdens and migration patterns.

It’s not a perfect relationship, of course, since there are many factors that might lead households to move across state lines.

But tax is definitely part of the equation, especially since high-tax states no longer receive a big indirect subsidy from Uncle Sam.

A column in the Wall Street Journal explores this aspect of the issue.

…real-estate professionals say they are beginning to see early signs of an exodus to low-tax states. “I’ve seen a huge increase in the number of clients who want to purchase in Palm Beach to establish residency in Florida,” says Chris Leavitt, director of luxury sales at Douglas Elliman Real Estate in Palm Beach. …Real-estate developer David Hutchinson, president of Ketchum, Idaho-based VP Cos., is touting the tax advantages of living in Nevada on his company website… The border between California and Nevada bisects Lake Tahoe. Californians to the west can pay a state income-tax rate of up to 13.3%, while Nevada residents just 30 minutes to the east pay no state income taxes.

A Democratic political consultant warns that his party could be hurt.

With state deductions now capped at $10,000, the cost of living in states such as California and New York – where state taxes are notoriously high – is increasing substantially. This has the potential to lead both middle-class families, and even the wealthy, to begin questioning whether it is time to move to a more tax-friendly state. …In one high-profile example of the impact of high taxes, professional golfer Phil Mickelson recently slammed California’s taxes and threated to leave the state. “If you add up all the federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate’s 62, 63 percent,” Mickelson said. …New York Gov. Andrew Cuomo – seeking re-election this year and a potential 2020 Democratic presidential contender – recognizes the threat that tax migration may pose. “If you lose the taxpayers, you lose the revenue,” Cuomo said in December.

Though maybe it would be better for Governor Cuomo to say “lost the revenue.”

Here’s another chart from Chris Edwards’ study. The light-blue states are attracting the most new residents (i.e., taxpayers) while the bright-red states (like New York) are losing the most residents (former taxpayers).

Needless to say, the states with better tax policy tend to be net recipients of taxpayers, and taxable income.

In closing, it’s important to understand that tax-motivated migration also exists between countries.

Here are some excerpts from a column in the New York Times.

When a country begins to fall into economic and political difficulty, wealthy people are often the first to ship their money to safer havens abroad. The rich don’t always emigrate along with their money, but when they do, it is an even more telling sign of trouble. …In a global population of 15 million people each worth more than $1 million in net assets, nearly 100,000 changed their country of residence last year. …In 2017, the largest exoduses came out of Turkey (where a stunning 12 percent of the millionaire population emigrated) and Venezuela. As if on cue, the Turkish lira is now in a free fall. There were also significant migrations out of India under the tightening grip of its overzealous tax authorities… Millionaire migrations can be a positive sign for a nation’s economy. The losses for India, Russia and Turkey were gains for havens like Canada and Australia, joined lately by the United Arab Emirates. …Millionaires move money mainly out of self-interest, to find more rewarding or safer havens. There aren’t a lot of them, but they can tell us a great deal about what is going wrong — and right — in a country’s economic and political ecosystems. Leaders who create the right conditions to keep millionaires home will find that all of their residents — not just the wealthy ones — are richer for it.

I like footloose millionaires because – as discussed in the article – they act as canaries in the coal mine. When they start moving, that sends a helpful signal to the rest of us.

And I also cheer migrating millionaires since they can cause big Laffer-Curve effects. And that puts an external constraint on the greed of politicians.

Which helps ordinary taxpayers like you and me since politicians generally use higher tax burden on the rich as a softening-up tactic before grabbing more money from the masses.

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New Jersey is a fiscal disaster area.

It’s in last place in the Tax Foundation’s index that measures a state’s business tax climate.

It’s tied for last place in the Mercatus Center’s ranking of state fiscal conditions.

And it ranks in the bottom-10 in measures of state economic freedom and measures of unfunded liabilities for bureaucrat pensions.

All of this led me, last October, to warn that the state was suffering from fiscal decay.

Then, two months ago, James Freeman of the Wall Street Journal wrote about how New Jersey’s uncompetitive fiscal system was encouraging highly productive taxpayers to leave the state.

The Garden State already has the third largest overall tax burden and the country’s highest property tax collections per capita. Now that federal reform has limited the deduction for state and local taxes, the price of government is surging again among high-income earners in New Jersey and other blue states. Taxpayers are searching for the exits. …says Jeffrey Sica, founder of Circle Squared, an alternative investments firm. “We structure real estate deals for family offices and high-net-worth individuals and at a record pace those family offices and individuals are leaving the TriState for lower-tax states. Probably a dozen this year at least,”…In the decade ending in 2016, real economic growth in New Jersey clocked in at a compound annual percentage rate of 0.1, just slightly higher than John Blutarsky’s GPA and less than a tenth of the national average for economic growth. The Tax Foundation ranks New Jersey dead last among the 50 states for its business tax climate. …Steven Malanga calls Mr. Murphy’s plan “the U-Haul Budget” for the new incentives it gives New Jersey residents to flee.

You would think that New Jersey politicians would try to stop the bleeding, particularly given the impact of federal tax reform.

But that assumes logic, common sense, and a willingness to put the interests of people above the interests of government. Unfortunately, all of those traits are in short supply in the Garden State, so instead the politicians decided to throw gasoline on the fire with another big tax hike.

The Wall Street Journal opines today on the new agreement from Trenton.

Governor Phil Murphy and State Senate leader Steve Sweeney have been fighting over whether to raise tax rates on individuals or businesses, and over the weekend they decided to raise taxes on both. Messrs. Murphy and Sweeney agreed to raise the state’s income tax on residents making more than $5 million to 10.75% from 8.97% and the corporate rate on companies with more than $1 million in income to 11.5% from 9%. This will give New Jersey the fourth highest marginal income tax rate on individuals and the second highest corporate rate after Iowa.

New Jersey is pursuing class warfare, but the politicians don’t seem to realize that the geese with the golden eggs can fly away.

The two Democrats claim this will do no harm because about 0.04% of New Jersey taxpayers will get smacked. But those taxpayers account for 12.5% of state income-tax revenue and their investment income is highly mobile. The state treasurer said in 2016 that a mere 100 filers pay more than 5.5% of all state receipts. Billionaire David Tepper escaped from New Jersey for Florida in 2015, and other hedge fund managers could follow. Between 2012 and 2016 a net $11.9 billion of income left New Jersey, according to the IRS. The flight risk will increase with the new limit of $10,000 on deducting state and local taxes on federal tax returns. …About two-thirds of New Jersey’s $3.5 billion income outflow last year went to Florida, which doesn’t have an income tax. …The fair question is why any rational person or business that can move would stay in New Jersey.

That’s not merely a fair question, it’s a description of what’s already happening. And it’s going to accelerate – in New Jersey and other uncompetitive states – when additional soak-the-rich schemes are imposed (unless politicians figure out a way to put fences and guard towers at the border).

A few months ago, I conducted a poll on which state would be the first to suffer a fiscal collapse. For understandable reasons, Illinois was the easy “winner.” But I won’t be surprised if there are a bunch of new votes for New Jersey. Simply stated, the state is committing fiscal suicide.

P.S. What’s amazing (and depressing) is that New Jersey was like New Hampshire as recently as the 1960s, with no state sales tax and no state income tax.

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Even though I wrote about proposed tax increases in Illinois just 10 days ago, it’s time to revisit the issue because the Tax Foundation just published a very informative article about the state’s self-destructive fiscal policy.

It starts by noting that the aggregate tax burden is higher in Illinois than it is in adjoining states.

Just what are Illinois’ neighbors doing on taxes? They’re taxing less, for starters. In Illinois, state and local taxes account for 9.3 percent of state income. The state and local taxes in Illinois’ six neighboring states account, in aggregate, for 8.0 percent of the income of those states.

Here’s the table showing the gap between Illinois and its neighbors. And it’s probably worth noting that the tax gap is the largest with the two states – Indiana and Missouri – that have the longest borders with Illinois.

While the aggregate tax burden is an important measure, I’ve explained before that it’s also important to focus on marginal tax rates. After all, that’s the variable that determines incentives for productive behavior since it measures how much the government confiscates when investors and entrepreneurs generate additional wealth.

And this brings us to the most important point in the article. Illinois politicians want to move in the wrong direction on marginal tax rates while neighboring jurisdictions are moving in the right direction.

Except for Iowa, all of Illinois’ neighbors have cut their income taxes since Illinois adopted its “temporary” income tax increases in 2011—and Iowa is on the verge of adopting a tax reform package that cuts individual income tax rates… Over the same period, Illinois’ single-rate income tax was temporarily raised from 3 to 5 percent, then allowed to partially sunset to 3.75 percent before being raised to the current 4.95 percent rate. A 1.5 percent surtax on pass-through business income brings the rate on many small businesses to 6.45 percent. Now there are calls to amend the state constitution to allow graduated-rate income taxes, with proposals circulating to create a top marginal rate as high as 9.85 percent (11.35 percent on pass-through businesses).

Here’s the chart showing the top rate in various states in 2011, the top rates today, and where top tax rates could be in the near future.

What’s especially remarkable is that Illinois politicians are poised to jack up tax rates just as federal tax reform has significantly reduced the deduction for state and local taxes.

For all intents and purposes, they’re trying to drive job creators out of the state (a shift that already has been happening, but now will accelerate).

Normally, when I write that a jurisdiction is committing fiscal suicide, I try to explain that it’s a slow-motion process. Illinois, however, could be taking the express lane. No wonder readers overwhelmingly picked the Land of Lincoln when asked which state will be the first to suffer a fiscal collapse.

P.S. Illinois politicians claim they want to bust the flat tax so they can impose higher taxes on the (supposedly) evil rich. High-income taxpayers doubtlessly will be the first on the chopping block, but I can say with 99.99 percent certainty that class-warfare tax increases will be a precursor to higher taxes on everybody.

P.P.S. Illinois residents should move to states with no income taxes. But if they only want to cross one border, Indiana would be a very good choice. And Kentucky just shifted to a flat tax, so that’s another potential option.

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When I did a poll earlier this year, asking which state would be the first to suffer a fiscal crisis, I wasn’t terribly surprised that Illinois wound up in first place.

But I was surprised by the margin. Even though there’s a good case to be made for basket-case jurisdictions such as New Jersey, California, and Connecticut, Illinois not only got a plurality of votes, it received an absolute majority.

Based on what’s happening in the Land of Lincoln, it appears that state politicians want to receive a supermajority of votes. There’s pressure for ever-higher taxes to finance an ever-more-bloated bureaucracy.

And taxpayers are voting with their feet.

The Wall Street Journal editorialized about the consequences of the state’s self-destructive fiscal policy.

Democrats in Illinois ought to be especially chastened by new IRS data showing an acceleration of out-migration. The Prairie State lost a record $4.75 billion in adjusted gross income to other states in the 2015 tax year, according to recently IRS data released. That’s up from $3.4 billion in the prior year. …Florida with zero income tax was the top destination for Illinois expatriates… What’s the matter with Illinois? Too much for us to distill in one editorial, but suffice to say that exorbitant property and business taxes have retarded economic growth. …Taxes may increase as Democrats scrounge for cash to pay for pensions. …Illinois’s unfunded pension liabilities equalled 22.8% of residents’ personal income last year, compared to a median of 3.1% across all states and 1% in Florida. …Illinois’s economy has been stagnant, growing a meager 0.9% on an inflation-adjusted annual basis since 2012—the slowest in the Great Lakes and half as fast as the U.S. overall. This year nearly 100,000 individuals have left the Illinois labor force.

Here’s a chart showing a very depressing decline in the state’s labor force.

By the way, I wonder whether the chart would look even worse if government bureaucrats weren’t included.

The Chicago Tribune has a grim editorial about what’s happening.

From millennials to retirees, …Illinois is losing its promise as a land of opportunity. Government debt and dysfunction contribute to a weak housing market and a stagnant jobs climate. State and local governments face enormous pension and other obligations. Taxes have risen sharply; many Illinois politicians say they must rise more. People are fleeing. Last year’s net loss: 33,703.

In an editorial for the Chicago Tribune, Kristen McQueary correctly worries about the trend.

It’s one thing to harbor natural skepticism toward government. It’s quite another to take the dramatic step of moving your family, your home, your livelihood to another state to escape it. But it’s happening. The naysayers and deniers blame the weather. They eye-roll the U-Haul rebellion. They downplay the dysfunction. Good riddance to those stingy taxpayers, they trumpet. But that is a shallow, ignorant and elitist viewpoint that dismisses the thoughtful and wrenching decisions thousands of once-devoted Illinoisans have made. For four years in a row, Illinois has lost population in alarming numbers. In 2017, Illinois lost a net 33,703 residents, the largest numerical population decline of any state. That’s the size of St. Charles or Woodridge or Galesburg. Wiped off the map. In one year. …Policy choices have consequences. …People are fleeing Illinois. And still, Democratic leaders in Chicago and Cook County, and their supporters, generally deny that high taxes, underfunded pensions, government debt and political dysfunction are the reasons for the exodus — or that it’s acute.

Newspapers in other states have noticed, as evinced by this editorial from the Las Vegas Review-Journal.

When the progressive political class preaches equality and prosperity, but bleeds productive citizens dry by treating them as little more than human ATMs, there should be little surprise when those same citizens take themselves (and their green) to greener pastures. Perhaps no state in the nation is seeing a bigger such exodus than Illinois. …On the flip side, all of the states surrounding Illinois saw their populations increase… Illinois is experiencing a self-inflicted storm of fiscal distress. …While state income taxes in Illinois don’t reach they level impose in states such as New York and California, that’s not for a lack of trying. The state raised its rate by 32 percent over the summer, and Democrats want to even more progressive tax rates to pay for all the goodies they’ve promised to Big Labor in order to grease their re-elections. …Illinois is a financial basket case — which is what you get when you combine political patronage with powerful public-sector unions that control leftist politicians. The state should be a case study for other jurisdictions on how not to conduct public policy. After all, who will pay the bills when the taxpayers flee?

Steve Chapman, in a column for Reason, expects more bad news for Illinois because of pressure for higher taxes.

With the biggest public pension obligations, the slowest personal income growth, and the biggest population loss of any state, it has consistently recorded achievements that are envied by none but educational to all. The state is in the midst of a debilitating fiscal and economic crisis. …Illinois has endured two income tax increases in the past seven years. In 2011, the flat rate on individual income jumped from 3 percent to 5 percent. In 2015, under the original terms, it fell to 3.75 percent—a “cut” that left the rate 25 percent above what it was in 2010. Then last year, over Gov. Bruce Rauner’s veto, the legislature raised the rate to 4.95 percent. None of these changes has ended the state’s economic drought, and it’s reasonable to assume they actually made it drier. …well-paid people can’t generally leave the country to find lower tax rates. They can leave one state for another, and they do. …A 2016 poll by the Paul Simon Public Policy Institute at Southern Illinois University found that nearly half of residents would like to leave the state—and that “taxes are the single biggest reason people want to leave.”

The Wall Street Journal opined on the state’s slow-motion suicide.

The only…restraint…on public union governance in Illinois…the state’s flat income tax. …Democrats in Springfield have filed three constitutional amendments to establish a graduated income tax… Democrats are looking for more revenue to finance ballooning pension costs, which consume about a quarter of state spending. …Connecticut and New Jersey provide cautionary examples. Democrats in both states have soaked their rich time and again, and the predictable result is that both states have fewer rich to soak. Economic growth slowed and revenues faltered. This vicious cycle is already playing out in Illinois amid increasing property, income and business taxes. Over the last four years, Illinois GDP has risen a mere 0.9% per year, half the national average and the slowest in the Great Lakes region. Between 2012 and 2016, Illinois lost $18.35 billion in adjusted gross income to other states. …Democrats claim a progressive income tax will spare the middle-class, but sooner or later they’ll be the targets too because there won’t be enough rich to finance the inexorable demands of public unions. …Once voters approve a progressive tax, Democrats can ratchet up rates as their union lords dictate.

While a bloated and over-compensated bureaucracy (especially unfunded promises for lavish retiree benefits) is the top fiscal drain, the state also loves squandering money in other ways.

Here are some excerpts from a piece in the Belleville News-Democrat.

Illinois is the dependency capital of the Midwest. No other state in the region has more of its population dependent on food stamps… So what’s driving the state’s dependency crisis? State bureaucrats using loopholes and gimmicks to keep more people dependent on welfare. According to the Illinois Department of Human Services, nearly 175,000 able-bodied childless adults are on the program. These are adults in their prime working years — between the ages of 18 and 49 — with no dependent children and no disabilities keeping them from meaningful employment. …the state has relied upon loopholes and gimmicks to trap more and more able-bodied adults in dependency. Federal law allows states to seek temporary waivers of the work requirement in areas with unemployment rates above 10 percent or with a demonstrated lack of job opportunities in the region. …the Illinois Department of Human Services…used old data and it gerrymandered the request in whatever way was necessary to keep more able-bodied adults on welfare. …State bureaucrats have gamed the system and as a result, thousands of able-bodied adults will remain trapped in dependency, with little hope of better lives.

Let’s close with some excerpts from a very depressing column in the Chicago Tribune by Diana Sroka Rickert.

…this is a state government that has been broken for decades. It is designed to reject improvement in every form, at every level. …The Thompson Center…is a near-perfect representation of state government. It is gross, rundown, and nobody cares. …there is a disturbing sense of entitlement among some state employees. …Underperformers aren’t fired; they’re simply transferred to different positions, shuffled elsewhere on the payroll or tucked away at state agencies. …this is a state government that is ranked last by almost every objective and measurable standard. A state government that fails every single one of its residents, day after day — and has failed its residents for decades. A state government that demands more and more money each year, to deliver increasingly less value.

Keep in mind, incidentally, that all this bad news will almost certainly become worse news thanks to last year’s tax reform. Restricting the state and local tax deduction means a much smaller implicit federal subsidy for high-tax states.

P.S. If you want good news on state tax policy, South Dakota may have the nation’s best system. And North Carolina arguably has taken the biggest step in the right direction. Kentucky, meanwhile, has just switched to a flat tax.

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California is a lot like France. They’re both wonderful places to visit.

And they’re both great places to live if you already have a lot of money.

But neither jurisdiction is very friendly to people who want to get rich. And, thanks to tax competition, that’s having a meaningful impact on migration patterns.

I’ve previously written about the exodus of successful and/or aspirational people from France.

Today we’re going to examine the same process inside the United States.

It’s a process that is about to get more intense thanks to federal tax reform, as Art Laffer and Steve Moore explain in a column for the Wall Street Journal.

In the years to come, millions of people, thousands of businesses, and tens of billions of dollars of net income will flee high-tax blue states for low-tax red states. This migration has been happening for years. But the Trump tax bill’s cap on the deduction for state and local taxes, or SALT, will accelerate the pace. …Consider what this means if you’re a high-income earner in Silicon Valley or Hollywood. The top tax rate that you actually pay just jumped from about 8.5% to 13%. 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%. …high earners in places with hefty income taxes—not just California and New York, but also Minnesota and New Jersey—will bear more of the true cost of their state government. Also in big trouble are Connecticut and Illinois, where the overall state and local tax burden (especially property taxes) is so onerous that high-income residents will feel the burn now that they can’t deduct these costs on their federal returns. On the other side are nine states—including Florida, Nevada, Texas and Washington—that impose no tax at all on earned income.

Art and Steve put together projections on what this will mean.

Over the past decade, about 3.5 million Americans on net have relocated from the highest-tax states to the lowest-tax ones. …Our analysis of IRS data on tax returns shows that in the past three years alone, 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. Now that the SALT subsidy is gone, how bad will it get for high-tax blue states? Very bad. We estimate, based on the historical relationship between tax rates and migration patterns, that both California and New York will lose on net about 800,000 residents over the next three years—roughly twice the number that left from 2014-16. Our calculations suggest that Connecticut, New Jersey and Minnesota combined will hemorrhage another roughly 500,000 people in the same period. …the exodus could puncture large and unexpected holes in blue-state budgets. Lawmakers in Hartford and Trenton have gotten a small taste of this in recent years as billionaire financiers have flown the coop and relocated to Florida. …Progressives should do the math: A 13% tax rate generates zero revenue from someone who leaves the state for friendlier climes.

I don’t know if their estimate is too high or too low, but there’s no question that they are correct about the direction of migration.

And every time a net taxpayer moves out, that further erodes the fiscal position of the high-tax states. Which is why I think one of the interesting questions is which state will be the first to suffer fiscal collapse.

In large part, taxpayers are making a rational cost-benefit analysis. Some states have dramatically increased the burden of government spending. Yet does anyone think that those states are providing better services than states with smaller public sectors? Or that those services are worth all the taxes they have to pay?

Consider, for instance, the difference between New York and Tennessee.

New York spends nearly twice as much on state and local government per person ($16,000) as does economically booming Tennessee ($9,000).

Anyhow, I’m guessing the new restriction on the state and local tax deduction is going to change the behavior of state politicians. At least I hope so.

But nobody ever said politicians were sensible. Ross Marchand of the Taxpayers Protection Alliance explains that Massachusetts and New Jersey are still thinking about more class-warfare taxation.

Massachusetts and New Jersey are currently considering “millionaires’ taxes,” which would significantly increase top rates and spark a “race to the top” for revenue… Instead of helping out the middle class, a millionaires’ tax will result in an exodus from the state, squeezing out opportunities for working Americans. …Prominent millionaires respond to these proposals by threatening to leave, and research shows that the well-to-do regularly follow through on these promises.  …nearly all of the migration that does happen in top brackets has to do with tax changes. Researchers at Stanford University and the Treasury Department estimate that a 10 percent increase in taxes causes a 1 percent bump in migration, assuming no change in any other policy. …If New Jersey and Massachusetts approve new millionaires’ taxes, it is difficult to predict how much will be raised and where these funds will ultimately wind up. But if New York and California are any guide, income surtaxes will be destructive. When it comes to higher taxation, interstate migration is just the tip of the iceberg. Higher-tax states, for instance, see less innovative activity and scientific research according to an analysis by economists at the Federal Reserve and UC Berkeley.

My suggestion is that politicians in Massachusetts and New Jersey should look at what’s happening to California.

CNBC reports on the growing exodus from the Golden State.

Californians may still love the beautiful weather and beaches, but more and more they are fed up with the high housing costs and taxes and deciding to flee to lower-cost states such as Nevada, Arizona and Texas. …said Dave Senser, who lives on a fixed income near San Luis Obispo, California, and now plans to move to Las Vegas. “Rents here are crazy, if you can find a place, and they’re going to tax us to death. That’s what it feels like. At least in Nevada they don’t have a state income tax. And every little bit helps.” …Data from United Van Lines show some of the most popular moving destinations for Californians from 2015 to 2017 were Texas, Arizona, Oregon, Washington and Colorado. Other experts also said Nevada remains a top destination. …Internal Revenue Service data would appear to show that the middle-class and middle-age residents are the ones leaving, according to Joel Kotkin, a presidential fellow in Urban Futures at Chapman University in Orange, California. …Furthermore, Kotkin believes the outmigration from California may start to rise among higher-income people, given that the GOP’s federal tax overhaul will result in certain California taxpayers losing from the state and local tax deduction cap.

The Legislative Analyst’s Office for the California legislature has warned the state’s lawmakers about this trend.

For many years, more people have been leaving California for other states than have been moving here. According to data from the American Community Survey, from 2007 to 2016, about 5 million people moved to California from other states, while about 6 million left California. On net, the state lost 1 million residents to domestic migration—about 2.5 percent of its total population. …Although California generally has been losing residents to the rest of the country, movement between California and some states deviates from this pattern. The figure below shows net migration between California and individual states between 2007 and 2016. California gained, on net, residents from about one-third of states, led by New York, Illinois, and New Jersey.

Here’s the chart showing where Californians are moving. Unsurprisingly, Texas is the main destination.

By the way, state-to-state migration isn’t solely a function of income taxes.

A Market Watch column looks at the impact of property taxes on migration patterns.

Harty’s clients range from first-time buyers with sticker shock to people who’ve lived in and around Chicago all their lives. Each has a different story, but they share a common theme: many believe that Chicago-area property taxes are too high, and relief is just an hour away over the state line. …if all real estate is local, all real estate taxes may be even more so. …Attom’s data show that the average tax burden ranges from $10,612 in the most expensive metro area, Bridgeport-Stamford-Norwalk, Connecticut, to $525 in Montgomery, Alabama. And those are just averages. …taxes are “the icing on the cake” in areas that are seeing strong population inflows… Among the counties that saw the biggest percentage of in-migration in 2017, according to Census data, all are in Texas, Florida, Georgia, or the Carolinas. (Texas doesn’t have particularly low property taxes, but it has no personal income tax, making the overall tax burden much more manageable.) Cook County, where Chicago is located, had the biggest number of people leaving… Blomquist’s analysis of Census data showed that among all counties that had at least a 1% population increase, the average tax bill was $2,706, while in all counties with a least a 1% decline in population, the average was $3,900.

The key sentence in that excerpt is the part about Texas having relatively high property taxes, but making up for that by having no state income tax.

The same thing is true about New Hampshire.

But just imagine what it must be like to live in a state with high income taxes and high property taxes. If this map is any indication, places such as New York and Illinois are particularly awful for taxpayers.

Let’s close with a big-picture look at factors that drive state competitiveness.

Mark Perry takes an up-close look at the characteristics of the five states with the most in-migration and out-migration.

…four of the top five outbound states (Illinois ranked No. 46, Connecticut at No. 49, New Jersey at No. 48, and California at No. 47) were among the five US states with the highest tax burden — New York was No. 50 (highest tax burden). The average tax burden of the top five outbound states was 11.2%, with an average rank of 43.2 out of 50. In contrast, the top five inbound states have an average tax burden of 8.7% and an average rank of 16.6 out of 50. As would be expected, Americans are leaving states with some of the country’s highest overall tax burdens (IL, CT, CA and NJ) and moving to states with lower tax burdens (TN, SC and AZ). …that there are significant differences between the top five inbound and top five outbound US states when they are compared on a variety of measures of economic performance, business climate, tax burdens for businesses and individuals, fiscal health, and labor market dynamism. There is empirical evidence that Americans do “vote with their feet” when they relocate from one state to another, and the evidence suggests that Americans are moving from states that are relatively more economically stagnant, Democratic-controlled fiscally unhealthy states with higher tax burdens, more regulations and with fewer economic and job opportunities to Republican-controlled, fiscally sound states that are relatively more economically vibrant, dynamic and business-friendly, with lower tax and regulatory burdens and more economic and job opportunities.

Here’s Mark’s table, based on 2017 migration data.

As Mark said, people do “vote with their feet” for smaller government.

Which is one of the reasons I’m a big fan of federalism. When there’s decentralization, people can escape bad policy. And that helps to discipline profligate governments.

P.S. I’m writing today’s column from Switzerland, which is a very successful example of genuine federalism.

P.P.S. Americans are free to move from one state to another, and the uncompetitive states can’t stop the process. Unfortunately, the IRS has laws that penalize people who want to move to other nations. In this regard, the U.S. is worse than France.

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I’m a big fan of federalism because states have the flexibility to choose good policy or bad policy.

And that’s good news for me since I get to write about the consequences.

One of the main lessons we learn (see here, here, here, here, and here) is that high-earning taxpayers tend to migrate from states with onerous tax burdens and they tend to land in places where there is no state income tax (we also learn that welfare recipients move to states with bigger handouts, but that’s an issue for another day).

In this interview with Stuart Varney, we discuss whether this trend of tax-motivated migration is going to accelerate.

I mentioned in the interview that restricting the state and local tax deduction is going to accelerate the flight from high-tax states, which underscores what I wrote earlier this year about that provision of the tax bill being a “big [expletive deleted] deal.”

I suggested that Stuart create a poll on which state will be the first to go bankrupt.

And there’s a lot of data to help people choose.

Technically, I don’t think bankruptcy is even possible since there’s no provision for such a step in federal law.

But it’s still an interesting issue, so I decided to create a poll on the question. To make it manageable, I limited the selection to 10 states, all of which rank poorly in one of more of the surveys listed above. And, to avoid technical quibbles, the question is about “fiscal collapse” rather than bankruptcy, default, or bailouts. Anyhow, as they say in Chicago, vote early and vote often.

P.S. I asked a similar question about bankruptcies in developed nations back in 2011. Back then, it appeared Portugal might be the right answer. Today, I’d pick Italy.

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In 2016, here’s some of what I wrote about the economic outlook in Illinois.

There’s a somewhat famous quote from Adam Smith (“there is a great deal of ruin in a nation“) about the ability of a country to survive and withstand lots of bad public policy. I’ve tried to get across the same point by explaining that you don’t need perfect policy, or even good policy. A nation can enjoy a bit of growth so long as policy is merely adequate. Just give the private sector some “breathing room,” I’ve argued.

I subsequently pointed out that politicians in Illinois were doing their best to suffocate the private sector, and also warned that a tax hike would push the state even closer to a day of reckoning.

Let’s apply this same analysis to California.

So here are some excerpts from a column I wrote about the Golden State in 2016

Something doesn’t add up. People like me have been explaining that California is an example of policies to avoid. Depending on my mood, I’ll refer to the state as the France, Italy, or Greece of the United States. But folks on the left are making the opposite argument. … statists…do have a semi-accurate point. There are some statistics showing that California has out-performed many other states over the past couple of years. … California may have enjoyed some decent growth in recent years as it got a bit of a bounce from its deep recession, but it appears that the benefits of that growth have mostly gone to the Hollywood crowd and the Silicon Valley folks. I guess this is the left-wing version of “trickle down” economics.

So what’s happened in California since I wrote that article?

Well, lots of California-type policies.

And where does that leave the state? Is California heading in the wrong direction faster or slower than Illinois?

Victor Davis Hanson’s column in Investor’s Business Daily has a grim assessment. He explains that California residents pay a lot for lousy government.

Some 62% of state roads have been rated poor or mediocre. There were more predictions of huge cost overruns and yearly losses on high-speed rail — before the first mile of track has been laid. One-third of Bay Area residents were polled as hoping to leave the area soon. Such pessimism is daily fare, and for good reason. The basket of California state taxes — sales, income and gasoline — rates among the highest in the U.S. Yet California roads and K-12 education rank near the bottom. …One in three American welfare recipients resides in California. Almost a quarter of the state population lives below or near the poverty line. Yet the state’s gas and electricity prices are among the nation’s highest. One in four state residents was not born in the U.S. Current state-funded pension programs are not sustainable. California depends on a tiny elite class for about half of its income tax revenue. Yet many of these wealthy taxpayers are fleeing the 40-million-person state, angry over paying 12% of their income for lousy public services.

In effect, statist policies have created two states, one for the rich and the other for the poor.

…two antithetical Californias. One is an elite, out-of-touch caste along the fashionable Pacific Ocean corridor that runs the state and has the money to escape the real-life consequences of its own unworkable agendas. The other is a huge underclass in central, rural and foothill California that cannot flee to the coast and suffers the bulk of the fallout from Byzantine state regulations, poor schools and the failure to assimilate recent immigrants from some of the poorest areas in the world. The result is Connecticut and Alabama combined in one state.

Jonah Goldberg is not quite as pessimistic. He opines that the state has certain natural advantages that help it survive bad policy.

California attracts an enormous number of rich people who think it’s worth the high taxes, awful traffic, and even the threat of tectonic annihilation to live there — for reasons that literally have nothing to do with the state’s liberal policies. Indeed, most of the Californians I know live there despite those policies, not because of them. No offense to South Dakota, but if it adopted the California model of heavy regulation, high taxes, and politically correct social engineering, there’d be a caravan of refugees heading to states such as Wyoming and Minnesota. …Wealthy liberal Californians can be quite smug about how they can afford their strict land-use policies, draconian environmental regulations, and high taxes. And wealthy Californians can afford them — but poor Californians are paying the price.

Regarding the state’s outlook, I’m probably in the middle. Goldberg is right that California is a wonderful place to live, at least if you have plenty of money. But Hanson is right about the deteriorating quality of life for the non-rich.

Which may explain why a lot of ordinary people are packing up and leaving.

A columnist from the northern part of the state writes about the exodus of the middle class.

The number of people packing up and moving out of the Bay Area just hit its highest level in more than a decade. …Operators of a San Jose U-Haul business say one of their biggest problems is getting its rental moving vans back because so many are on a one-way ticket out of town. …Nationwide, the cities with the highest inflows, according to Redfin are Phoenix, Las Vegas, Atlanta, and Nashville.

And a columnist from the southern part of the state also is concerned about the middle-class exodus.

All around you, young and old alike are saying goodbye to California. …2016 census figures showed an uptick in the number of people who fled…the state altogether. …Las Vegas is one of the most popular destinations for those who leave California. It’s close, it’s a job center, and the cost of living is much cheaper, with plenty of brand-new houses going for between $200,000 and $300,000. …”There’s no corporate income tax, no personal income tax…and the regulatory environment is much easier to work with,” said Peterson. …Nevada’s gain, our loss.

What could immediately cripple state finances, though, is out-migration by the state’s sliver of rich taxpayers. Especially now that there’s a limit on how much the federal tax system subsidizes California’s profligacy.

Here are some worrisome numbers, as reported by the Sacramento Bee.

Will high taxes lead the state’s wealthiest residents to flee the Golden State for the comparable tax havens of Florida, Nevada and Texas? Republicans reliably raise that alarm when Democrats advocate for tax increases, like the 2012 and 2016 ballot initiatives that levied a new income tax on very high-earning residents. But now, with the federal tax bill cutting off deductions that benefited well-off Californians, the state’s Democrats suddenly are singing the GOP song about a potential millionaire exodus. …Democratic state lawmakers are worried because California relies so heavily on the income taxes it collects from high earners to fund government services. The state’s wealthiest 1 percent, for instance, pay 48 percent of its income tax, and the departure of just a few families could lead to a noticeable hit to state general fund revenue. …Among high-income brackets, about 38 percent of Californians who earn more than $877,560 – the top 1 percent – would see a tax hike. About 25 percent of Californians earning between $130,820 and $304,630, also would see a tax increase… “The new tax law is kind of like icing on the cake for some who were thinking about moving out of the state,” said Fiona Ma, a Democrat on the tax-collecting Board of Equalization who is running for state treasurer. …Joseph Vranich, who leads an Orange County business that advises people on where to locate their businesses, called the tax law “one more nail in the coffin” that would cause small- and middle-size entrepreneurs to leave California.

Politicians and tax collectors get resentful when the sheep move away so they no longer can be fleeced.

This powerful video from Reason should be widely shared. Thankfully it has a (mostly) happy ending.

One of the reasons the state has awful tax policy is that interest groups have stranglehold on the political system. And that leads to ever-higher levels of spending.

Writing for Forbes, for example, Josh Archambault examines the surge of Medicaid spending in the state.

Over the past ten years, Medicaid spending in California has almost tripled, growing from $37 billion per year to a whopping $103 billion per year—including both state and federal funding. And things have only accelerated since the state expanded Medicaid to a new group of able-bodied adults. …nearly 4 million able-bodied adults are now collecting Medicaid, which was once considered a last-resort safety net for poor children, seniors, and individuals with disabilities. …California initially predicted that its ObamaCare expansion would cost roughly $11.6 billion in the first three fiscal years of the program. The actual cost during that time? An astounding $43.7 billion. …Though California represents only 12 percent of the total U.S. population, it receives more than 30 percent of all Medicaid expansion spending.

And the Orange County Register recently opined about the ever-escalating expenses for a gilded class of state bureaucrats.

California’s annual state payroll grew by 6 percent in 2017, an increase of $1 billion and twice the rate of growth of the previous year. …Employee compensation is one of the largest components of the General Fund budget. In 2015-16, salaries and benefits accounted for about 12 percent of expenditures from the General Fund, a total of over $13 billion. …pay increases drive up pension costs. …The administration estimated that the annual cost to the state for the pay raises would be $2 billion by 2020-21, but the LAO said that didn’t take into account the higher overtime costs that would result from higher base pay, or the extra pension costs from that overtime. …if an economic downturn caused state revenues to decline, taxpayers would still have to pay the high and rising salaries for the full length of the contract.

The last sentence is key. I’ve previously pointed out that California has a very unstable boom-bust fiscal cycle. The state looks like it’s in good shape right now, but it’s going to blow up when the next recession hits.

Let’s close by acknowledging that poor residents also pay a harsh price.

Kerry Jackson’s article in National Review is rather depressing.

California — not Mississippi, New Mexico, or West Virginia — has the highest poverty rate in the United States. According to the Census Bureau’s Supplemental Poverty Measure — which accounts for the cost of housing, food, utilities, and clothing, and which includes non-cash government assistance as a form of income — nearly one out of four Californians is poor. …the question arises as to why California has so many poor people… It’s not as if California policymakers have neglected to wage war on poverty. Sacramento and local governments have spent massive amounts in the cause, for decades now. Myriad state and municipal benefit programs overlap with one another; in some cases, individuals with incomes 200 percent above the poverty line receive benefits, according to the California Policy Center. California state and local governments spent nearly $958 billion from 1992 through 2015 on public welfare programs.

That’s probably a partial answer to the question. There’s a lot of poverty in the state because politicians subsidize idleness. In effect, poor people get trapped.

The author agrees.

…welfare reform passed California by, leaving a dependency trap in place. Immigrants are falling into it: Fifty-five percent of immigrant families in the state get some kind of means-tested benefits… Self-interest in the social-services community may be at work here. If California’s poverty rate should ever be substantially reduced by getting the typical welfare client back into the work force, many bureaucrats could lose their jobs. …With 883,000 full-time-equivalent state and local employees in 2014, according to Governing, California has an enormous bureaucracy — a unionized, public-sector work force that exercises tremendous power through voting and lobbying. Many work in social services. …With a permanent majority in the state senate and the assembly, a prolonged dominance in the executive branch, and a weak opposition, California Democrats have long been free to indulge blue-state ideology.

And one consequences of California’s anti-market ideology is that poor people are falling further and further behind.

P.S. If Golden State leftists really do convince their neighbors to secede, I suspect the country would benefit and the state would suffer.

P.P.S. And if California actually chooses to move forward with secession, the good news is that we already have a template (albeit satirical) for a national divorce in the United States.

P.P.P.S. Closing with some California-specific humor, this Chuck Asay cartoon speculates on how future archaeologists will view the state. This Michael Ramirez cartoon looks at the impact of the state’s class-warfare tax policy. And this joke about Texas, California, and a coyote is among my most-viewed blog posts.

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