Austin, Texas photo by Flickr user sbmeaper1
There is still a long road ahead, but with the arrival of COVID-19 vaccines, the end of the pandemic’s darkest days are in sight. Some of its effects are likely to be long-lasting, and not only when it comes to public health.
For many industries, remote work some or all of the time has become the norm in the past year. Bosses and colleagues have gotten used to relying on video conferencing, instant messaging and other tools that allow workers to collaborate across town and across time zones. This led employers and employees alike to consider whether staying put in places like San Francisco or New York City made sense.
The result: People are moving out of high-tax states, often to states like Florida or Texas that do not levy state income taxes. Elon Musk – who recently surpassed Jeff Bezos to become the world’s wealthiest person – confirmed his move from California to Texas at a virtual conference last month. Dropbox CEO Drew Houston also traded San Francisco for Austin, Texas. So did Douglass Merritt, the CEO of software company Splunk Technology.
This exodus predates the pandemic. Alexis Ohanian, who co-founded Reddit, ditched California for Florida years ago. Keith Rabois, a former executive at PayPal and LinkedIn, and Shutterstock founder Jon Oringer decamped for South Florida too. It isn’t only technology executives making the move, either. Carl Icahn announced in 2019 that he, and his firm, would be moving from New York to Miami. David Blumberg, founder and managing partner of Blumberg Capital, also headed for the Sunshine State.
To some degree, these moves are high-profile examples of a larger trend that the pandemic accelerated. By the end of 2020, New York City lost at least 300,000 residents, and San Francisco lost some 90,000. Los Angeles, Chicago and Washington, D.C. also experienced smaller but significant outflows. Tech industry workers were among those most likely to decamp for places offering a more reasonable cost of living, including smaller tax burdens. This was, in part, because their employers gave them confidence that they wouldn’t have to reverse course without warning. Facebook and Google-parent Alphabet gave workers the assurance they could work remotely through at least mid-2021, if not longer. Twitter and Slack announced they’d allow most employees to stay remote for good.
States have every incentive to welcome these workers. Even without income tax, an influx of residents widens the base for sales and property taxes. Many cities and states are familiar with vying for the attention of a business looking to move or open a new location – just think of the scramble to court Amazon a few years ago. But certain places are starting to court workers, too. States and cities including Arkansas, Vermont, Tulsa, Oklahoma and Topeka, Kansas offer programs in which successful applicants receive benefits for moving, including cash payments of up to $10,000. Other places offer tax breaks or other financial perks to new arrivals. These programs are largely aimed at young professionals who can work remotely.
But with people like Musk and Icahn on the move, municipalities may not be thinking big enough.
Even states without state income tax can benefit from welcoming wealthy residents. New Hampshire and Tennessee don’t tax wages, but do tax investment earnings. Other states levy an estate or inheritance tax. High net worth residents may contribute to local political organizations or charitable institutions. They may also bring jobs with them. Musk’s SpaceX already operated in South Texas, and a new Tesla manufacturing site is underway in the Austin area.
Of course, the incentives for wealthy individuals would likely look different than those designed to lure tech workers relatively early in their careers. And there are critics of the idea that direct incentives are necessary at all. If a state or city offers a business-friendly atmosphere with a competitively low tax burden, its attractions will speak for themselves, some argue.
Whether or not you believe low-tax states should do more to attract high earners, there is evidence that high-tax states are taking the wrong lesson from the loss of workers, and especially the loss of high net worth residents. In many states with high income tax, these residents already shoulder much of the burden of state revenue generation. A little more than half of New York’s revenue comes from the personal income tax paid by the highest earning 2% of filers, according to figures cited by The Wall Street Journal. The top 1% of earners in California generate more than 45% of the state’s income tax revenue. Letting high earners go understandably worries state lawmakers. But instead of considering ways to encourage residents to stay, or even attracting new ones, lawmakers have floated proposals to increase the burden on the high earners who remain.
In December, some New York state senators pushed to raise rates on high-income residents, with the potential for the increase to apply retroactively. Gov. Andrew Cuomo, who has long argued that raising taxes on high earners will simply drive them away, signaled in December that the state’s fiscal problems mean a hike is probably inevitable. The only question is how dramatic it will be. California lawmakers, too, have moved toward raising income taxes, and also proposed a state-level wealth tax. That proposal didn’t succeed in 2020, but it could return this year. Illinois lawmakers also have an eye on tax increases, though voters rejected a 2020 ballot initiative to remove a state constitutional requirement mandating a flat tax system. If Illinois lawmakers want to raise taxes for the wealthy, they have to raise them for everyone.
It is too soon to say whether any, or many, of the workers who have relocated during the pandemic will return to their points of origin when it ends. But the migration of high net worth residents to more welcoming states and cities began before the pandemic and will extend beyond it. States hoping to secure the benefits of such residents would do well to consider more carrots and fewer sticks.