Could Higher Rates Trigger Interstate Exodus?

According to Michael Mazerov, senior scholar at the Center on Budget and Policy Priorities, other research indicates that state taxes may not have a significant effect on migration trends.

Although high incomes are more likely to relocate out of some high-tax jurisdictions, there is no indication of a "mass exodus" from states such as New York, according to Mazerov, who published a paper on the subject in August 2023.

Tax Adjustments

Meanwhile, absent modifications from Congress, a number of tax code changes implemented by former President Donald Trump would expire after 2025.

The Tax Cuts and Jobs Act, or TCJA, of 2017, among other things, decreased the proportion of higher incomes liable to the alternative minimum tax, doubled standard deductions, increased gift and estate tax exemptions, and lower federal tax rates.

Additionally, the Tax Cut and Jobs Act (TCJA) imposed a temporary $10,000 ceiling on the state and local tax deduction, or SALT, which has been a major problem in high-tax states like California, New Jersey, and New York. The restriction was put in place to increase tax receipts for further TCJA measures.

It's hard to say, though, if the SALT ceiling would rise beyond 2025 given the uncertainty surrounding the White House and Congress's leadership, particularly in light of the federal budget deficit.

Economic Impact of Tax Policies

The TCJA of 2017 has had significant economic impacts on both high-tax and low-tax states. For high-tax states such as California, New York, and New Jersey, the TCJA's $10,000 cap on ALT deductions has been particularly burdensome. This cap has led to higher effective tax rates for residents of these states, potentially discouraging high-income earners from staying or moving there. As a result, these states may experience a reduction in tax revenues, which could impact state budgets and the funding of public services such as education, infrastructure, and healthcare.

In contrast, low-tax states may have benefited from the TCJA through increased attractiveness for high-income individuals seeking to minimize their tax liabilities. This migration could lead to an expanded tax base and increased state revenues, potentially boosting economic growth and allowing for greater investment in public services and infrastructure.

Looking ahead, the potential expiration of the TCJA provisions after 2025 introduces uncertainty into state economies and individual financial planning. If the SALT cap is lifted or adjusted, high-tax states might see a reversal of the outflow of high-income earners, stabilizing or even increasing their tax revenues. Conversely, the continuation of the SALT cap could perpetuate the financial strain on these states, forcing them to find alternative revenue sources or cut public services.

For individual financial planning, changes to the TCJA could significantly alter tax liabilities. High-income individuals in high-tax states would need to reassess their strategies, potentially shifting their investment or residency plans based on new tax implications. Meanwhile, individuals in low-tax states might see less impact, but changes in federal tax rates and deductions could still influence overall financial planning.

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