For America's wealthy, the tax gap between states is getting more difficult to ignore.
More than a dozen states, most run by Republicans, have cut income taxes on the wealthy since the start of the pandemic. By contrast, Democrat-controlled New York, New Jersey, Washington State and the District of Columbia hiked rates on their highest-earners.
The stakes have never been higher, especially after former President Donald Trump signed into law a cap on the federal state and local tax, or SALT, deduction at $10,000 per year. Congressional Democrats are currently debating changes to the limit.
Academic research has found taxes have historically had little impact on where people live—particularly on the wealthy who can afford to reside wherever they want. States like California, which levies the U.S.’s highest rate of 13.3% on income over $1 million, remain economic dynamos, places where huge fortunes continue to be minted.
But there’s no doubt at least some very wealthy people are re-locating to lower-tax locales, bringing billions of dollars of tax revenue with them. Elon Musk, the world’s richest person, moved from California to Texas. Super-rich New Yorkers—including billionaire investor Carl Icahn and Trump—fled to Florida, and the biggest financial firms, including Goldman Sachs Group Inc., Apollo Global Management Inc. and Point72 Asset Management, followed suit, taking steps to expand in the Sunshine State and other locations far from Wall Street.
As Red and Blue states diverge so sharply on taxes and spending, they’re making competing bets with potentially massive economic consequences.
The Widening Tax Gap
“Eventually, [lawmakers in high-tax states will] have to deal with the consequences of seeing wealthier people leave,” said Katherine Loughead, senior policy analyst at the conservative Tax Foundation. “Some people are willing to accept higher tax rates, but you get to a point where it gets too high and people look to do business elsewhere.”
Republican lawmakers around the country are also looking enviously at states with no state income taxes at all, including Florida, Texas and Nevada, that have seen their populations and economies grow quickly over the last decade, Loughead said. Unexpectedly strong tax revenue is allowing states to cut taxes now. Fears at the beginning of the pandemic of large budget shortfalls haven’t materialized.
“The competition is definitely heating up,” she said.
This year Tennessee joined the club of states with no income tax. The Volunteer State, which already had no levy on salaries or wages, phased out its tax on interest and dividend income in 2021. New Hampshire is following a similar path: The state’s income tax, limited to investment income, is being eliminated by lowering the rate to zero over several years.