Americans flocked to states with low or no income taxes during the pandemic, according to a new report, reaping savings from their work-from-home flexibility.
“People move to states with low-income tax for a multitude of reasons, sometimes it’s the most direct and obvious reason that it reduces their own tax liability,” said Jared Walczak, vice president of state projects with the Center for State Tax Policy at the Tax Foundation. “Especially now that people have more capacity to move where they want, that will be a higher priority for some.”
States with higher income tax rates saw significant population declines, whereas states with lower taxes had accelerated population growth, according to the Tax Foundation analysis that used U.S. Census Bureau population data and commercial datasets from U-Haul and United Van Lines.
For example, the District of Columbia — which raised income taxes in 2021— saw its population downsize an estimated 2.8% between April 2020 and July 2021, while New York, which has some of the highest taxes, lost 1.8% of its residents. This was followed by Illinois, Hawaii, and California — all high-tax states — which make up the top five states with the largest population losses.
By contrast, low or no personal income tax states saw the biggest population increases, including Florida, Texas, New Hampshire, South Dakota, Nevada, and Tennessee.
While the last two years of the pandemic have allowed people with increased mobility to make this move, high tax levels are not the only reason some have packed up a U-Haul, according to Walczak.
“There are also second-order effects,” Walczak said. “States with lower tax burdens and with more pro growth tax codes have higher rates of growth and higher economic opportunity – and people will move to seek out those things even beyond their own tax burdens.”
You could have significant savings
While no or low income states may have higher sales or property taxes, the total tax burden often remains lower. Take Texas, for example, which has higher property taxes than the average.
“But even then for most people, the combination of Texas’ higher than average property taxes and no income taxes is still a significant tax savings over most of the states they might have moved from,” Walczak said.
Nine states with population gains either implemented or enacted cuts to the individual or corporate income tax rates last year. Meanwhile, New York, which had the highest population loss, and D.C. actually raised income taxes in 2021 — the only places to do so.
Local taxes can also add to people’s overall tax burden. For instance, the analysis found that the average top marginal state and local income tax rate is 3.5% for states that saw population gains, while the rate is 7.3% for the third of states with the highest tax rates.
“I’m one of the people that’s trying to leave New York City to minimize tax burdens,” said Ramona Cedeño, CPA and founder of FiBrick, an accounting firm for tech companies and small businesses. “Just up north of New York in the county of Westchester. New York can be so expensive.”
If she relocated, she could save around 5% to 6% on taxes, she said.
‘Migration of people looking for better economic opportunities’
A growing number of young, working people are moving across state lines due to flexibility from work-from-home arrangements.
“In the past before COVID, we stayed in these high-tax states because there was another reason to. My office was based in New York City and I had clients in California, which required me to be there physically,” Cedeño said. “Now that we can work remotely and you don’t have to see clients all the time, you can live anywhere.”
Typically, state-to-state migration is led by retirees leaving colder and high-tax states for ones with low or no income taxes that often have warmer climates. Not now, necessarily, Walczak said.
“This isn’t a migration of just retirees, but more and more a migration of people looking for better economic opportunities,” Walczak said, “people moving or looking for jobs, lower cost of living, lower taxes, and overall opportunity.”
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.
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