According to recent data from the Internal Revenue Service, New York state experienced an outmigration that resulted in a loss of $25 billion in adjusted gross income tax in 2021, on top of the $20 billion lost in 2020. Similarly, California reported a net loss of $29 billion in 2021, following a loss of $18 billion in 2020. When combined, these figures indicate that the two states suffered a total loss of $92 billion over the course of two years.
The data reveals that the trend of income flight from high-tax states to low-tax states, which has been ongoing for several years, gained momentum during the Covid pandemic. In 2021, the income losses for California and New York exceeded three times their combined losses in 2019, before the pandemic impacted the United States.
Higher-tax states are expected to continue experiencing outflows of high-earning individuals
According to experts, although the income migration from states may have decreased in 2022 and 2023 following the pandemic highs, higher-tax states are expected to continue experiencing outflows of high-earning individuals, partially due to the growth of remote work and white-collar jobs in the sun belt region. The trend of high-earners relocating to lower-tax areas accelerated during Covid, causing New York and California to lose over $90 billion in income as taxpayers moved to other states.
Florida has emerged as the biggest beneficiary of the migration trend, as per the IRS data. The Sunshine State gained a net of 128,000 households in 2021, resulting in an inflow of over $39 billion in income, which is a significant increase from the $28 billion it gained in 2020. Additionally, Palm Beach County, which includes the affluent town of Palm Beach, saw a gain of over $11 billion in income alone in 2021, according to the IRS.
Approximately $10 billion of Florida’s gain, which accounts for almost a third of the state’s overall increase, was derived from New York, according to reports. California, Illinois, and New Jersey, on the other hand, each lost over $4 billion in income to Florida in 2021. The increased income is having a ripple effect throughout Florida’s economy, as demonstrated by a recent Bureau of Labor Statistics report, which indicates that Florida has had more total jobs than New York since 1982 when the Bureau began monitoring the figures.
Other statements and loss of taxable income
Texas was another big winner, adding $11 billion in income. California’s loss was mostly to Texas’s benefit, with over $5 billion in income transferring from California to Texas. In addition to Texas, other winners included Nevada, North Carolina, and Arizona, which collectively gained about $14 billion in income.
The losses in high-tax states were mainly among higher-earning individuals, which is likely to have a disproportionate impact on tax revenues in the long run. In 2021, the average income of households leaving New York reached a record high of $130,000. Moreover, the average income of those relocating from New York to Florida was even higher, at $223,245, which is a 64% increase from the average income of individuals who moved out between 2019 and 2020.
Several high earners, such as hedge fund managers and private equity executives, relocated to Florida during the pandemic. These groups typically represent some of the largest individual taxpayers in New York, New Jersey, and Connecticut.
Despite this trend, many Democrats argue that the issue of income flight is exaggerated, as the number of millionaires in New York and California has remained stable or even increased to an all-time high. They suggest that states should increase taxes on the wealthy as federal aid declines and tax revenues begin to decrease.
Last month, lawmakers in New York pushed for a tax hike on individuals earning over $5 million annually, but Governor Kathy Hochul prevented the proposal from going forward. Both California and New York, which had budget surpluses in 2022, are now forecasting deficits for 2023 and 2024. California is estimating a deficit of $24 billion in the upcoming fiscal year, while New York is projecting a deficit of more than $7 billion by 2025.