The Tax Man and Urban Flight: Fact and Fiction of Outmigration Trends

Rising inequality and budget deficits brought about by the novel coronavirus have some clients asking PIMCO whether high-tax states will consider raising taxes further, and whether higher taxes will trigger a longer-term trend of outmigration.

On the issue of whether taxes will rise, there is little doubt.

Here are just a few examples:

  • California suspended the use of net-operating-loss carryforwards, which allow businesses to reduce future tax liabilities. California has also temporarily limited business tax credits.
  • New Jersey recently implemented a 20% increase in the state’s personal income tax for residents earning more than $1 million annually.
  • Voters in the Land of Lincoln will consider a ballot initiative this November to change Illinois’ long-standing flat personal income tax to a progressive tax structure.

This scatter chart shows the highest personal income tax rates by state, from highest to lowest. They are as follows: California (13.3%), Hawaii (11.0%), New Jersey (10.75%), Oregon (9.9%), Minnesota (9.85%), New York (8.82%), Vermont (8.75%), Iowa (8.53%), Arizona (8.0%), and Illinois (7.99%).

We remind clients that following the global financial crisis, most states enacted some form of a tax hike, including temporary (California, Illinois) and permanent (New York) increases in personal income taxes.