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Municipal Bonds

Which states have lost or gained taxable income?

Cadmus M. Hicks
Director of Performance Risk and Analysis
taxable income

Under provisions of the Tax Cuts and Jobs Act of 2017 that are still in effect, the amount of state and local taxes (SALT) that can be deducted by individual taxpayers is limited to $10,000.

Government officials from states with higherthan-average tax rates on personal income and real estate property values are concerned that the inability to deduct those taxes has made them more burdensome to upper income taxpayers who typically itemize their deductions, and that the higher effective tax rates might motivate such taxpayers to move to states with lower tax rates.

The increase in the number of people who work remotely due to the Covid-19 pandemic has amplified the risk that states with high tax rates and high costs of housing may lose residents to states where the cost of living is lower.

Do higher taxes motivate residents to relocate?

Given the impact of the limitation on the SALT deduction, municipal analysts and investors would like to know whether the higher net cost of state and local taxes motivates upper income resident 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.

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 did not move but remained in the state during both years.

For example, in 2021, 150,686 tax returns were filed in the state of New York by people who had lived in other states in 2020 (Figure 1). Those returns represented 224,559 people claimed for personal exemptions. The amount of adjusted gross income reported by those taxpayers was $13.6 billion.

However, people who had been residents of New York in 2020 filed 292,795 tax returns in states other than New York in 2021. Those returns covered 486,344 newly relocated residents, whose combined adjusted gross income totaled $38.1 billion. As a result of these relocations, New York lost 261,785 residents and $24.5 billion of adjusted gross income, which was equal to 3.27% of the adjusted gross income of people who filed returns in New York in both 2020 and 2021.

Figure 1 

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 2020 and 2021). 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. (See Figure 3 in the Appendix for data on all states for 2021, and Figure 4 for net migration values for the six years since 2015.)

Figure 2 

Figure 2 also includes columns showing the average AGI of those moving to a state, and those leaving that 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 states which 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 $149,201, while the average AGI of those who left the state was $72,067, while those who immigrated to California from other states had average AGI of $87,072, while departing taxpayers had average AGI of $125,362. Of the 22 states and the District of Columbia which had a net loss of adjusted gross income in 2021 due to migration, in only one did incoming residents report more AGI per return than departing residents, while of the 28 states which gained AGI, in only four states did incoming residents report less AGI per return than departing residents.

For states with a net loss in AGI in 2021, the average AGI per return of arrivals was $73,308, while those departing reported $86,195 per return. For states with a net gain, the average newcomer had AGI of $88,165, while the average income of those leaving was $71,146.

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 passage of the Tax Cuts and Jobs Act of 2017 and became even greater since the start of the COVID-19 pandemic. The amount of AGI that moved from state to state has increased from $36.8 billion in 2016, to $45.8 billion in 2017, $40.8 billion in 2018, $42.6 billion in 2019, $62.7 billion in 2020, and $87.1 billion in 2021. 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.

View net migration in 2016-2021

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Endnotes
Sources
Internal Revenue Service data on tax migration

https://www.irs.gov/statistics/soi-tax-stats-migration-data-2020-2021

This material is not intended to be a recommendation or investment advice, does not constitute a solicitation to buy, sell or hold a security or an investment strategy, and is not provided in a fiduciary capacity. The information provided does not take into account the specific objectives or circumstances of any particular investor, or suggest any specific course of action. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with his or her financial professionals.

The views and opinions expressed are for informational and educational purposes only as of the date of production/writing and may change without notice at any time based on numerous factors, such as market or other conditions, legal and regulatory developments, additional risks and uncertainties and may not come to pass. This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, estimates of market returns, and proposed or expected portfolio composition. Any changes to assumptions that may have been made in preparing this material could have a material impact on the information presented herein by way of example. Performance data shown represents past performance and does not predict or guarantee future results. Investing involves risk; principal loss is possible.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such. For term definitions and index descriptions, please access the glossary on nuveen.com. Please note, it is not possible to invest directly in an index.

Important information 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 financial professional regarding their tax situation. Nuveen is not a tax advisor. Investors should contact a tax professional regarding the appropriateness 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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This information does not constitute investment research as defined under MiFID.

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