America's Money Migration: Democratic States Keep Losing Taxpayer Income

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From the opinion pages of the Wall Street Journal, this is Potomac Watch.

New numbers from the IRS on state income migration show that money continues to flow out of high

tax jurisdictions, including California, New York, and Illinois, and into low tax ones, most

prominently Florida. But blue states don't seem to be getting that message, as Washington

Governor Bob Ferguson on Monday, signs a new millionaire's tax into law that critics say is

unconstitutional. Welcome, Kyle Peterson with the Wall Street Journal. We're joined today by my

colleagues on the Journal's opinion pages, columnist Alicia Finley and editorial board member Colin

Levy. On Friday, the Internal Revenue Service released new data on the adjusted gross incomes

of tax filers who moved, including across the country and U-Halls between 2022 and 2023.

That means there's a lag in the data, but it can still be useful, including shedding light on

migration patterns and how they might have changed after COVID and the pandemic.

Alicia, you've looked at this data. What is your read about what we can learn from it?

Well, I think if you look at the data and again, there's a little bit of lag. So 2022 to 2023

is the latest data that they have. It shows the out migration from the predominantly high tax

states to lower tax states has continued and dropped off a little bit from the boom years during

2020-2021 amid the lockdowns and kind of a shift to remote work. So the out migration and

immigration general migration even within states has dropped and that also partly owes to higher

interest rates, which has made it more expensive or harder for homeowners to move.

But you see the same trends that were already occurring before the pandemic and in part is

you've got a lot of people from New York, New Jersey, the Northeast who are moving down to

lower tax crimes in the Sun Belt. This are the top states that have lost adjusted gross income

and that's how the IRS actually breaks in. The data is by adjusted gross income and they do not

make these spreadsheets very easily digestible, by the way, for the common people. New York lost

$9.9 billion, Illinois, $6 billion, Massachusetts, $4 billion, New Jersey, $2.6, Maryland, $1.8 billion,

and Minnesota, $1.5 billion. Again, these largely are roughly, if you were to adjust these data going

back to 2019 per inflation, they're about on par to what they were pre-pandemic. So you are already

seeing these trends pre-pandemic. They continue. Now, some of the biggest gainers are also the same

kind of states that were gaining people and income before the pandemic and that would include,

for instance, Texas, Nevada. Florida's the biggest $20.6 billion, South Carolina, North Carolina,

Arizona. Most of these are again, Sun Belt states, but obviously it's not just the weather that's

attracting people because this California has been losing a lot of people in income. And on the

other hand, New Hampshire and Wyoming and South Dakota, all with no income, taxes have actually

gained largely from their neighbors. For instance, New Hampshire gained about 900 million from

Massachusetts, which interestingly enough in 2022. I didn't have 4% tax surcharge on a million

aires. And I think one other interesting thing about this is that migration slowed, at least from

pandemic levels for most states, as I was saying, but it didn't actually slow for Massachusetts.

And you've actually seen pretty steady flows since the pandemic out of Massachusetts, not with

standing, you know, a decline generally in mobility and migration that may, in part, owe to that

tax increase that they passed. That point about the weather, I think, is a good one because

often I think blue states dismiss these kinds of trends. They say, well, people are moving from

Illinois to Florida. What do you expect? But those outliers, you mentioned, I'll repeat them,

New Hampshire, Wyoming, and South Dakota gaining income in this IRS data. You're not moving to

South Dakota for the weather, unless maybe you're moving south from North Dakota and thinking,

probably a lot of people move from North Dakota to South Dakota. Pretty balmy down here. But I

do think that that underlines the economic point that incentives matter. No surprise to economists,

but when businesses, small businesses, many who were taxed through the individual tax code are

trying to figure out where is a good place to set up shop, to expand, to create a new office,

a new location. They take these things seriously. And Alicia, what do you think it says about

the spiral that many of these blue high tech states seem to be in? And maybe the precariousness

of their fiscal models. So just as one example, this is from the Empire Center for Public

Policy in New York, it says, filers in the top one percent, which roughly correspond to income

of a million dollars and more accounted for 46% of income tax paid and one third of total state

tax revenue in 2023, the most recent year for which data are available. And I've seen similar

figures like that for the share of California income taxes that are paid by the top one percent.

But if state lawmakers by continuing to increase these rates add on millionaires taxes,

and then multi-millionaire taxes on top of that with higher graduated rates, I mean,

this part of what they're potentially doing is scaring off the golden goose.

Well, I think there are two problems. That's one of the days you're driving away. The top

runners nuisance saw that with Washington state, which we'll probably discuss a little later,

which has lost Jeff Bezos as well as Howard Schultz, entrepreneurs who, you know,

started their businesses in Washington state. California probably has a little bit more

bandwidth or leeway to tax just because let's be honest, because it has nicer weather than places

like New York, but you have seen a huge exodus of high earners, you know, hedge fund managers,

people who can have, you know, a choose where they live, they don't have to be at a set location

to lower tax state. So that is one problem. It's just that when you drive away high earners,

that eventually will catch up to you and result in less revenue or less revenue than you otherwise

would have collected. Now, a lot of the progressive left will say, well, these states,

they're still getting a lot of income tax revenue, but that's because markets in my opinion,

I mean, they've been pretty frothy, you know, there's been a run up in stock prices. So that's

boosted capital gains. Probably is that what goes up will eventually come down. There will eventually be

a market correction, you know, stock prices are falling now somewhat, because of the war in

Iran, you know, but the heavy times will lock into you forever. And if you recall, 2008-2009,

a lot of these states in California faced over $100 billion in deficits for many years,

because it was so reliant on higher earners. And when you basically hedge your budgets or

your budgets to the fortunes of the wealthy, you have a much more volatile tax streams.

Then you go through these boom bust cycles. And then all of a sudden, revenue is kind of dry up.

And these states, you know, they're very low to cut spending. In many cases, they've made

contractual promises to government unions, whether it be in terms of pensions or other just

labor agreements that make it difficult to cut back on spending. And so what they end up doing

is just raising taxes more. In many cases, by the way, they're also raising taxes on the middle class,

and you can call and can probably speak to that in Illinois, but that's their go-to in many of

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Welcome back. But despite this being a long story of people and capital moving, Colin,

it seems to me that blue states by and large are not getting the message. And we've mentioned

once now Washington State where the governor on Monday, Bob Ferguson signed a new

millionaires tax. He said adoption of the historic millionaires tax makes our tax system

more fair. Let's listen also to a press conference this week with Washington State's

house majority leader, Joe Fitzgibbon. This is much more than a millionaires tax bill. This is a

tax reform bill. It's high in when so many Washington families are struggling to make ends meet.

We are going to make it a more affordable place to live and a better place to work and to do

business. In addition to asking our wealthiest neighbors, the people who have done so

extraordinarily well in our thriving tech-based economy, we're also making it more affordable for

families to afford diapers for babies and for adults to afford Tylenol to afford so.

Meantime, as one example, former Starbucks CEO Howard Schultz has announced in recent days that

he is relocating to Florida for his retirement phase. Colin, you've looked at this

Washington proposal. Give us a sense of what this new law is going to do.

Yeah, I mean, as far as Washington State goes, it's really hard to imagine a bigger act of

self-sabotage. It's a 9.9 percent tax on household income over a million dollars, so it's going to

hit dual income earner families where each partner earns under a million. It's not just about

the economic impact on the state, which is obviously going to be significant, but in Washington's

case, it's also about what it communicates to voters about lawmakers respect for the state

constitution, because Washington has, you know, long had a state constitution that bans an income

tax. The constitution specifically says that all taxes on property have to be uniform, and it

makes clear that property is supposed to be defined as both tangible and intangible properties,

so that letter category obviously includes income. So that's one of the reasons why what happened

this week was so jarring. It's really hard to imagine any definition anywhere that says a person's

income is not their property. That's just basic logic, and it's also very clear text in the

Washington Constitution. So I think lawmakers knew better than to support this tax, and I think

the Washington voters also knew that they knew better, and that they did it anyway, and so that was

really a bad precedent, you know, in terms of setting how elected officials are approaching their

responsibilities there. You know, Analisha's point on the middle class, though, I think that's

really an important one, because all tax increases ultimately hit the middle class. In Washington's

state, this is really a kind of bait and switch. It's a classic thing. They say, well, you know,

we're just going to put on the super high, super high threshold tax. It's not going to hurt that

many people. It's going to really help our state out a lot, and that's the way they're going to

shatter this constitutional norm that the state's been living under for so long. But already,

immediately after pushing this through, the small print on it says that the threshold, the

million dollar threshold is only going to be adjusted for inflation every other year. So that

means they're going to start scooping in people who weren't millionaires by the standards and

calculations from when the tax passed pretty quickly. And that's just a way to get less pushback

while changing the constitutional norms. And you know, once the state Supreme Court endorses it,

all bets are really off for middle class residents in Washington.

Do you think it's a foregone conclusion that the state justices will do that? I mean, if it's

as clear as we're discussing here that this is crosswise with the Washington Constitution,

is there going to be a legal challenge coming shortly? And our Democrats basically daring

the state Supreme Court, you know, we've sold this to voters. We've passed it. We've signed it into

law. We've celebrated it. Now we dare you to strike it down. So I'll shenanigans and lawmakers

seeing what they can get away with. You know, Kyle, you'll remember in 2024, the Washington

State Supreme Court issued a decision where they said that the state's effort at a Capitol

gains tax could be counted as an excise tax. That was sort of a groundbreaking decision there.

So after that, it was really kind of open season among Democratic lawmakers to see what they could

get passed the Washington State Court justices. So I think if they figured if the justices would

approve that, that this will get a green light too, there is going to be a challenge. Of course,

we knew there would be, it hasn't been filed yet, but the Citizens Action Defense Fund and

former Washington Attorney General Rob McKenna said on Monday that they're going to file a lawsuit

to challenge the constitutionality of the new income tax. And, you know, frankly, that's really

the only chance for getting rid of it, sadly, because there's also a provision in the bill to

designate it as an emergency measure so that it can't be overturned by a subsequent citizen

referendum. So things aren't looking too good right now for Washington State. I think it will soon

be joining the migration data that Alicia was talking about. It isn't only Washington State, though.

Alicia, we also have this pending referendum on a wealth tax in California, which interestingly

Gavin Newsom, the governor has come out against. What's the latest on that debate?

High earners or tech companies are trying to block it from getting to the ballot. I mean,

they're also circulating competing ballot measures that would essentially, you know, counter it.

So if it weren't even if it were approved, it would get struck down because it got less votes

than their own competing measure. Again, none of these have actually qualified for the ballot yet.

Newsom has come out or did come out against it. He actually last fall when the SEIU

United Health Care Workers' West, which is the union that spearheading the initiative

first proposed it in his concern or his putative concern is that it will drive higher earners out

of the state. And in fact, it already has. There have been about six billionaires who have left

since the SEIU started or proposed this initiative, this wealth tax. So that's already going to

crimp some of the state's income tax revenue. But I think it probably will make the ballot.

It will cost the SEIU a lot of money because they're apparently reportedly having to pay

the people who gather signatures about $12 per signature that they gather. And I think if there's

any benefit to this, this is going to drain some of their campaign funds for the election.

But I think it will ultimately end up being, and if you look at the polls right now, it's also

polling ahead. This will probably go down to litigation, get decided in the state's courts.

Hang tight. We'll be right back after one more break.

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From the opinion pages of the Wall Street Journal, this is Potomac Watch.

Welcome back. Meantime in New York, there's debates between Governor Kathy Hocal, the state

legislature in Albany and New York, Mayor Zora and Mamdani, about how to fund his dreams for

social spending, talks in the assembly, maybe to raise the income tax rate total state

and combined local to 15.9% from 14.8% and then Congress, Colin, proposal circulating there,

Democrat from Maryland, Chris Van Hollen wants to have new brackets on high earners raising the top

federal rate to 49%. It just seems like we need to know the line is always that we need people to

pay their fair share. And I would like people to pre commit to what they think a fair share is

because it seems like that number goes up all the time. And remember, we have a two three tiered

system of income taxation in the country. You have to pay federal taxes, you have to pay state

taxes. And then in some cities, including New York City, you end up having a local income tax

already. Some of those combined rates marginal on the next dollar of income that you earn are

over 50% I think. And if we're talking about maybe 15 in New York and 49 according to Chris Van

Hollen in the federal on your federal taxes, you were getting up to something like, you know, 65%

of the next marginal dollar somebody earns is taken by one taxing authority or another. And in

quiet moments, I wondered myself what the founders and what George Washington would think of rates

like that. I mean, I think states are increasingly dividing into two categories, right? The states

that are trying to reduce or phase out state income taxes completely. And then those that are

trying to raise income taxes, you know, and especially increased progressivity in the tax code

to target higher interest. We shouldn't forget that there is good news in other places in the country,

you know, Mississippi is phasing out its income tax with legislation that's going to cut the rate by

I think it's a quarter of a percentage point every year starting in 2027 until it gets down to

around 3% by 2030. After that, you know, other states are planning to do cuts that are triggered,

you know, if there's state revenue growth that hits certain targets, Mississippi is also lowering

its grocery taxes. So that's good for consumers and, you know, states like Indiana and Georgia have

been working on reducing income taxes in a similar format, you know, where they're doing these

phase outs are making the cuts contingent on specific state revenue targets. I mean, I think

taxpayers notice it's not that complicated. All the IRS stated that Alicia was talking about

earlier really shows that people are paying attention. You know, one thing that I would note here

Kyle that I think is an important piece of the puzzle and why there's such a big blue state red

state divide on this issue comes down to the unions. I mean, public unions in particular are often

such big noise makers on these issues because they really want to make sure that the locals and

state governments have coffers that are flush enough to meet their collective bargaining demands

for higher salaries or benefits on California. There's the SEIU affiliate that was trying to put a

referendum on the ballot for a wealth tax. You know, Alicia was talking about and they've also been

active in New York, of course, in Illinois, the Education Association and AFSCME supported a

progressive income tax a few years back for the same reason that it would, you know, increase revenue

from higher earners. So I think that's an important piece of the divide and the puzzle that you're

seeing here. Alicia will give you the last word, but I think Kyle makes a good point that the

divide seems to be growing as these blue states seem to be going higher. Many red states are

going to zero income tax. Tennessee went to zero recently. Kentucky is on the path to zero in a

January state of the state speech. Missouri's governor said he wants to go to zero over the next

five years. And that is part of what is driving these trends, these income migration trends,

the U-Hauls going from one side of the country to the other is not only that policy in states

like New York and California seems to be getting worse, but that policy in other states like Florida

seems to be getting better or there are more states that are going to match Florida and a zero

percent income tax rate is pretty hard to beat. Not just taxes. There are a variety of policies that

these states are enacting that make them more attractive than these other states and they've

also had stronger job growth and you can't disconnect that the job growth from the business

climate and the taxes. In fact, like a lot of these almost all these blue states by the way have

been losing jobs over the past two years if you exclude social assistance and health care,

which primarily rely on government funding, whereas the other states at least until recently

have seen pretty robust job growth and a variety of industries, manufacturing, finance,

you know, the retail leisure and hospitality. And so that's also driving a lot of migration.

And then you also have the center cost of living. So it's not just taxes. These other states also

have lower costs of living, lower housing costs, lower energy prices. And that's a result of the

same kind of supply side policies that these states are enacting by which I mean that encourage

more energy production ease regulations. It's that kind of mindset that we want to attract people

to our states versus the mentality that prevails. And these blue states like California, New York,

they say they want to welcome people and all that, but they really make it very difficult for

the middle class and working class people, anyone who actually isn't rich to live there. And then

you could go into their crime policies and all that, but there are a variety of reasons for the

migration and the continued migration and taxes are a big reason, but they're not the only reason.

Thank you, Alicia and Colin. Thank you all for listening. You can email your own U-Haul receipts

to PW podcast at WSJ.com. If you like the show, please hit that subscribe button,

and we'll be back tomorrow with another edition of Potomac Watch.

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