Do Tax Rates Have Consequences?

For many years, the IRS has been tracking the migration of citizens and their incomes across state lines. Since 1995, $2 trillion has migrated from high-tax states to those with reduced tax burdens. But it’s not just individual people that vote with their feet. Companies are voting, too, and the consequences will change the country’s socio-political landscape.

New York State has seen $68 billion of wealth leave over the last 18 years. California has said goodbye to $45 billion over the same period. Meanwhile, Texas gained $25 billion and Washington State gained a little over $12 billion. These figures, provided by Travis H. Brown, author of How Money Walks, are culled from IRS data and are net amounts adjusted for all transfers.

It turns out that numerous academic studies and politicians’ claims that high tax rates have no impact on people or job creation are wrong. The nine states that have no personal income tax economically outperform the nine states in the U.S. that have the highest taxes.

Illinois, which ranked 48th in Chief Executive’s Best & Worst States survey among CEOs last March, is facing the consequence of being a state with high tax and regulatory regime. Office Depot’s recent $1.2 billion acquisition of OfficeMax has yet to choose a permanent chief executive and a home. Whether Office Max continues to employ 2,000 in Naperville, IL, rests on whether Illinois will approve tax credits for the company to maintain a presence in the state. The alternative is to make Office Depot’s current headquarters in Boca Raton, FL, the official home of the new company where more than 1,700 people are employed.

The choice hinges on whether the company will see a tax relief in Illinois, which, at 9.5%, has one of the highest corporate tax rates in the country. A bill that would have offered the retailer $53 million in tax credits over 15 years didn’t get a full Senate vote in a session that ended last week, according to The Wall Street Journal, and state lawmakers might not return until next month at the earliest.

Meanwhile, Florida’s corporate tax rate is 5.5%, and state officials can provide tax breaks without legislative approval. Office Depot reportedly received up to $4.9 million in incentives about seven years ago, plus a $6.5 million reimbursement from the county to move into its current Boca Raton headquarters. Florida also has no personal income tax, which would benefit Office Depot’s employees.

States are battling one another to lure employers and the jobs that come with them. Washington State is pushing through $8.7 billion of tax and policy incentives to entice Boeing to build its planned 777X jetliner in its state instead of South Carolina where it battled unions and politicians to build its Dreamliner. Earlier this year, several states wooed GE to build a new plant that eventually went to North Carolina.

But Illinois faces a tricky situation. Three years ago, it raised the corporate tax rate which caused many companies to threaten to leave the state if they didn’t receive exemptions. Companies that stayed felt resentful when others such as Navistar and Sears Holdings (which have received nearly $500 million in tax breaks) were given such exemptions. State legislatures have come to resent the special pleading from companies wanting relief and say they won’t consider any more tax incentives until it can be demonstrated how Illinois’ $100 billion pension shortfall can be resolved.

In other words, Illinois has dug itself into a deep hole which continues to get deeper. The problem isn’t just tax rates. Companies re-locate for other reasons, too, not least of which is to have access to a desirable workforce. But a state with high personal tax rates is less likely to have happy, contented workers. Hence, the migration to states with less punitive costs of living.




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