Unlike Much of the North, Many in the South See the New Tax Plan as Good News

Tennessee Gov. Bill Haslam has a vastly different message about the new tax law than some of his fellow governors up North, and it can be summarized in three words: Bring it on.

The Republican, who is serving his second term as governor, says the old code advantaged residents in high-tax states because it allowed them to deduct an unlimited number of state and local taxes from federal ones.

"That's not going to be true anymore," Mr. Haslam said in an interview. "We governments have a price just like a business does. And, by the way, customers get to choose where they do business."

Southern states, where economic growth is outpacing Northern counterparts, are predicting that a new $10,000 cap on the federal deductions taxpayers can take for state and local taxes will make low-tax states more attractive for workers and businesses.

The South's optimism contrasts with worries in many Northern states that the changes will hurt their economies, where higher state and local taxes were offset, in part, by federal deductions for decades. New York Gov. Andrew Cuomo, a Democrat, said earlier this month he would sue the federal government for the tax changes, which he described as "an arrow aimed at New York's economic heart."

Southern states have been drawing migrants from Northern states for years, making it now the most populous region in the country -- a demographic shift that Mark Vitner, a Charlotte, N.C.-based senior economist for Wells Fargo & Co., calls "the affordability migration."

Property tax rates in the North are generally higher than down South, according to a 2015 report by the Tax Foundation, a conservative Washington-based group that tracks taxation across the U.S. The foundation found that the mean effective property tax rate in New York was 1.64% and 2.32% in Illinois, compared with 0.75% in Tennessee and 1.06% in Florida. Florida has no state income tax, while Tennessee has no state taxes on wages.

Job growth in the South has outpaced that in the Northeast in recent decades. Nonfarm employees in the region -- as defined by the U.S. Census Bureau -- of 16 states and the District of Columbia rose 23% between 1997 and 2016, outpacing the 17% growth of the national workforce, according to the U.S. Bureau of Labor Statistics. In the Northeast, growth was 12%.

While the South offers lower taxes, the region has the highest rate of poverty of the regions tracked by the Census Bureau. Education levels are also lower. For example, in Tennessee, 25% of people over 25 years old have a bachelor's degree or higher, compared with 35% of that same population in New York.

States like Florida, Alabama and South Carolina have long used their low-tax environment as a way to attract businesses, including auto and airline makers.

The Greater Fort Lauderdale Alliance, an economic development organization, has built a marketing campaign aimed at persuading businesses to relocate to the area. Its tagline: "Life. Less taxing."

In studies the group has conducted on what motivates companies to move, "the No. 1 thing we hear is the tax structure in Florida," said Bob Swindell, president of the organization. The new tax law, he added, "reinforces that messaging."

While people and businesses have been moving South for a host of reasons, from warmer weather to cheaper home prices, "research shows taxes matter, " said William Fox, an economist and director of the University of Tennessee's Boyd Center for Business & Economic Research.

Mr. Fox, who has studied migration to the South for years, said he expected the tax changes to have two main impacts for Southern states: more high-earners declaring their permanent residence in the region, and more middle-class workers relocating from the North.

Tennessee, a state of about 6.7 million people, gained more than 66,000 new residents last year, making it ninth among states by numeric growth. During the same period, New York state gained about 13,000 people.

Nashville, long a music center, has in recent years attracted health-care companies and other firms. Amazon.com Inc. included the city on its shortlist of locations for a second headquarters. And Volkswagen AG opened an assembly plant in Chattanooga in 2011.

Gov. Haslam said Tennessee and Southern neighbors have worked for years to keep taxes and other costs low in part to woo Northern migrants and businesses. The tax law "accelerates a trend that is already happening," he said.

(END) Dow Jones Newswires

January 23, 2018 05:44 ET (10:44 GMT)