The pandemic is exacerbating authorities tax competitors to draw companies and residents

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Tax competition between states to attract and retain businesses and residents has persisted for decades. The national migration pattern has generally evolved from cold northern states with high taxes to warm southern and southwestern states with low taxes.

Retirees who are no longer tied to a job or are raising children have been an integral part of the caravan of migrants heading south. However, for all but the richest, taxes are usually not the main factor.

“I think most retirees who move are about quality of life,” said Ryan Losi, CPA at Piascik in Richmond, Virginia. “The [lower] Taxes are the icing on the cake for them. “

The icing on the cake, however, is itself becoming the cake for a larger number of Americans. With tax rates expected to rise, government income, property and sales taxes are becoming bigger factors in deciding where to live and work for both individuals and business owners.

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Losi has had numerous calls from wealthy clients – especially business owners – since November to discuss a possible move to a low-tax country.

“I’m not talking about seniors,” he said. “These are people who will earn income for another 20 to 30 years.

“They see their states continue to raise income and corporate taxes, so they want to migrate elsewhere,” he added.

While taxes aren’t the only problem driving migration patterns, they are clearly a consideration.

Last year, California, Connecticut, Illinois, New Jersey and New York were the five states with the highest rates of outbound migration, according to the 2020 National Movers Study published annually by United Van Lines.

Four of these five states were classified by the tax foundation in the bottom five states in terms of the business tax climate in 2021. Illinois ranked 36th.

“High-tax countries are under more pressure today than they have been for a long time,” said Jared Walczak, vice president for state projects at the tax foundation. He said the pandemic and the generally positive remote work experience of millions of Americans over the past year are adding to the pressure.

“The growth of the remote work environment is an extremely big development,” he said. “Increasingly, people and businesses can choose where to settle.”

Most experts expect more people and companies to choose where to pay lower taxes. The relocations of well-known technology companies such as Oracle and Hewlett Packard from California’s Silicon Valley to Texas are just the best-known examples. Any business capable of operating remotely is likely to take its tax footprint far more seriously now.

“If a company is big enough and has offices across the country, it can assign people who work remotely to offices in low-tax countries,” said Walczak. “I think a lot more companies will want to offer their employees remote-friendly circumstances.”

This prospect is likely to keep many state tax administrators awake at night. Six states, including Connecticut, New York, and Pennsylvania, have “convenience” rules that allow them to tax employees of companies in the state even if they do not live or work in the state.

Massachusetts, which has an income tax rate of 5%, introduced such a rule last year in response to the pandemic. It is currently being sued by the state of New Hampshire, which has no income tax and has attracted many remote Massachusetts workers.

The remote working problem is likely to lead to further conflict between state tax authorities. It will certainly challenge high tax countries that seek a faster-eroding tax base.

“High-tax countries are like aircraft carriers – they spin slowly,” Losi said. “If they see more migration, they will have a shortage of income and greater difficulty in funding their obligations. These states are in great trouble.”

Many are currently doing better financially than expected. This is in large part due to federal coronavirus relief packages, particularly state-taxed increased unemployment benefits and healthy property tax revenues and capital gains from the still buoyant property and stock market, Walczak said. 42 states tax capital gains.

He suggests that high-tax countries do not overreact when more residents leave the state.

“If they put taxes on those who are left, it could be a self-fulfilling prophecy that will ensure more people leave,” he said. “California and New York don’t need Florida or Texas tax codes to compete for residents and businesses, but they can’t go in the opposite direction.”

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