Moving to a Low-Tax State Can Be an Expensive Way to Save Money

Do people really move because they think their state income taxes are too high? It’s been a longstanding debate. Finally, a recent report from the Tax Foundation provides some compelling evidence that yes, they do.

The right-leaning group analyzed data from the Internal Revenue Service that compares the addresses for tax returns filed for tax years 2018 and 2019. These are returns that were sent to the IRS starting in 2019 up until July 15, 2020 (because taxpayers were granted a three-month extension during the pandemic for their 2019 returns).

It's among the most comprehensive data I've seen covering relatively recent moves — encompassing some 150 million taxpayers who filed a return, along with their adjusted gross incomes.

The Tax Foundation focused on three categories: Top marginal individual income tax rates, tax code structure, and state and local tax collections per capita — in other words, a state’s total tax coffer (income tax plus other taxes like property tax and sales tax collected) divided by population.

By all three measures, the states experiencing the largest net inflows of taxpayers were lower-tax states. They had among the lowest top marginal rates, below-average state and local tax collections, and what the foundation deems “well-structured” tax codes. While many factors can spur a person to move, taxes seem to be part of the decision for many, with no- or low-tax states consistently the biggest winners.

Notably, seven of the 10 states that experienced the largest gains in taxpayers either had zero income tax or top rates below the national median during the time period. Now, nine of those states either have no income tax, a flat income tax, or plan to move to one. Likewise, the states that saw the biggest net losses of taxpayers were all states with relatively high tax burdens: New York, California, Illinois, Massachusetts and New Jersey. I wouldn't do this myself, but hey, I live in one of those high-tax states.