High-tax state exodus accelerated during the pandemic, analysis shows
Many states leading population growth have no income tax
The exodus from high-tax states escalated in 2021.
A new report from the Tax Foundation, a nonpartisan group that advocates for lower taxes, found that a growing number of Americans migrated from predominantly blue states like California and New York to red states with lower taxes last year. The findings are based on U.S. Census data as well as new information released this week by U-Haul and United Van Lines.
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Although the entire U.S. population as a whole grew by just 0.1% between July 2020 and July 2021 – a record low – the Census data underscores major differences in population growth at the state level. For instance, New York, which has one of the highest tax burdens in the nation, saw its population decline by 1.8% between March 2020 and July 2021. But Idaho, with one of the lowest tax rates, actually saw its population size grow by 3.8%, belying the national trend.
"The picture painted by this population shift is a clear one of people leaving high-tax, high-cost states for lower-tax, lower-cost alternatives," Jared Walczak, a Tax Foundation analyst, wrote in the report. "The individual income tax is only one component of overall tax burdens, but it is often highly salient, and is illustrative here."
The trend can be found in other high-tax states that are largely controlled by Democrats: Illinois saw its population shrink by 1.1%, while Hawaii's declined by 0.8% and California's fell by 0.8%. On the other end of the spectrum, Utah (2%), Montana (1.8%) and Arizona (1.4%) all saw their population grow during the pandemic.
In all, the average combined top marginal state and local income tax rate was just 3.5% for the top one-third of states for population growth. For the bottom one-third of states that saw their population decline, including Washington, D.C., the average combined top marginal state and local income tax rate was 7.3%.
Six states in the top third for population growth actually forgo individual income taxes altogether (Florida, Tennessee, Texas, Nevada, New Hampshire and South Dakota), while in the bottom third, California, New Jersey and New York all have double-digit income tax rates. Even the state with the lowest rate, Pennsylvania at 3.07%, has some of the highest local income tax rates in the country.
"The pandemic has accelerated changes in the way we live and work, making it far easier for people to move—and they have," Walczak said. "As states work to maintain their competitive advantage, they should pay attention to where people are moving, and try to understand why."
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Still, there are many reasons that people move – and the tax rate may be just one of many. it's also possible that taxes play no role in someone's decision to relocate.
"The Census data and these industry studies cannot tell us exactly why each person moved, but there is no denying a very strong correlation between low-tax, low-cost states and population growth," Walczak wrote. "With many states responding to robust revenues and heightened state competition by cutting taxes, moreover, these trends may only get larger."