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Which states have lost or gained taxable income
The Tax Cuts and Jobs Act of 2017 reduced the number of taxpayers who itemize deductions, and reduced the amounts that can be deducted. The Act did this by increasing the amount of the standard deduction, limiting the loan amount on which taxpayers can deduct mortgage interest expense and limiting the amount of state and local taxes that can be deducted.
These changes increase the net cost of state and local taxes for those who no longer find it beneficial to itemize, or who still itemize, but are limited in how much they can deduct. This impact is experienced most acutely by upper-income taxpayers, who have been most likely to itemize, and who are in higher tax brackets.
Do higher taxes motivate residents to relocate?
In light of these changes, municipal analysts and investors want to see whether the higher net cost of state and local taxes motivates upper-income residents to relocate to states with lower perceived tax burdens. A critical resource for this analysis is a data set provided by the Internal Revenue Service that shows how many taxpayers were in one state in one year, but in a different state in the following year.
The data show the number of returns that were filed by those who relocated, the number of personal exemptions taken on those returns, the amount of adjusted gross income reported on the returns during the second year, and the states from which, and to which, the taxpayers moved. Since early 2018, the most recent data covered migrations that occurred between 2015 and 2016, but in early January the IRS released data for both 2017 and 2018.
In analyzing the IRS numbers, we computed net migration by subtracting the number of returns filed by people who left the state from the number of returns by those who relocated to the state. We also computed the net change in the number of persons for which exemptions were claimed, and the net change in the amount of adjusted gross income (AGI) due to migration from state to state. To gauge the relative size of the change in AGI, we compared the net amount of AGI gained or lost to the amount of AGI reported by taxpayers who remained in the state during both years.
For example, as displayed in Figure 1, in 2018, 155,894 tax returns were filed in the state of New York by people who had lived in other states in 2017. Those returns represented 240,089 people claiming personal exemptions. The amount of adjusted gross income reported by those taxpayers was $12.6 billion. However, people who had been residents of New York in 2017 filed 232,671 tax returns in states other than New York in 2018. Those returns covered 399,870 newly relocated residents, whose combined adjusted gross income totaled $22.2 billion. As a result of these relocations, New York lost 159,781 residents and $9.6 billion of adjusted gross income, which was equal to 1.29% of the adjusted gross income of people who filed returns in New York in both 2017 and 2018.
New state residents tended to have higher AGI
Figure 2 shows data for the five states with the greatest net gain, or net loss, in adjusted gross income (expressed as a percentage of the AGI of those who were residents of the state in both 2017 and 2018). The table shows the net change in the number of returns, the number of personal exemptions, and the amount of adjusted gross income for each state. (Download the PDF to see Figure 4 in the Appendix for data on all states for 2018, and Figure 5 for net migration values for the three years from 2016 to 2018.)
Figure 2 also includes columns showing the average AGI of those moving to, and those leaving, a state. This analysis shows that the magnitude of the change in AGI was not just a function of the number of people moving from state to state, but also reflected the amount of AGI reported by those who migrated from state to state.
In general, states that recorded a net increase in the number of taxpayers due to migration tended to receive new residents whose AGI was greater than that of those who departed, while those that lost population tended to lose higher-income taxpayers while taking in those with lower incomes.
For example, in Florida, the average new taxpayer reported AGI of $103,372, while the average AGI of those who left the state was $62,722. Of the 30 states (and D.C.) that had a net loss of adjusted gross income in 2018 due to migration, in only three did incoming residents report more AGI per return than departing residents, while of the 21 states that gained AGI, in only three did incoming residents report less AGI per return than departing residents.
For states with a net loss in AGI in 2018, the average AGI per return of arrivals was $68,666, while those departing reported $77,911 per return. For states with a net gain, the average newcomer had AGI of $75,568, while the average income of those leaving was $63,250.
Places that gained AGI generally also gained new residents who were on average more affluent than those who left.
The trend also applied within counties
The IRS also provides data on the migration of taxpayers from county to county. Figure 3 shows the net change in taxpayers and income for the five counties in Illinois that gained or lost the most AGI as a percentage of total AGI. The table also includes Cook County, which is the largest county in Illinois, and home to the City of Chicago. The numbers include those who moved to or from a given county from another state, and to or from another county within the state.
Here again, we see that those places that gained AGI also gained new residents who were on average more affluent than those who left, while places that lost AGI were receiving people whose average income was lower than that of the people who were departing.
Marginal tax rates may be a motivating factor in relocating
The consistency of the distinction between those states that are attractive to upper-income taxpayers, and those that are unattractive to such taxpayers, supports the notion that marginal tax rates, which in most states are higher for those with more income, can be a motivating factor in the decision to relocate.
We should also note that the rate of migration has accelerated since the recent changes in the tax code were adopted. The amount of AGI that moved from state to state has increased from $23.6 million in 2015 to $36.8 million in 2016, $45.8 million in 2017, and $40.8 million in 2018. While we cannot be sure to what extent, if any, changes in tax law have encouraged more migration, it appears that the potential to lose taxable income due to migration is a matter of increasing importance to states that appear to be less attractive to affluent taxpayers.
Internal Revenue Service data on tax migration
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A word on risk
Investing involves risk; principal loss is possible. All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Bond insurance guarantees only the payment of principal and interest on the bond when due, and not the value of the bonds themselves, which will fluctuate with the bond market and the financial success of the issuer and the insurer. No representation is made as to an insurer’s ability to meet their commitments.
This information should not replace an investor’s consultation with a professional advisor regarding their tax situation. Nuveen Asset Management is not a tax advisor. Investors should contact a tax advisor regarding the suitability of tax-exempt investments in their portfolio. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on the state of residence. Income from municipal bonds held by a portfolio could be declared taxable because of unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of a bond issuer. It is important to review your investment objectives, risk tolerance and liquidity needs before choosing an investment style or manager.
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