That the loss of affluent taxpayers didn’t lead to disaster during the pandemic mainly had to do with how much the prices of stocks, houses and other assets rose in 2020 and 2021. New York is one of the country’s richest states; many residents own valuable assets or have incomes that rise with asset prices or both. As a result, while the number of taxpayers with incomes of $1 million or more who left the state jumped in 2020 and 2021, the number who stayed grew even more.
Now the market tide has gone out, sending income tax revenue plummeting nationwide — that’s the main reason we’re having a debt-ceiling showdown in Washington now instead of in the fall, as originally expected. In an indication that many affluent taxpayers have in fact left the state and stayed away, New York’s personal income tax receipts have fallen even faster and are now below their 2019 level.
Adjust for the high inflation of the past couple of years, and New York’s predicament becomes clearer and more dire. Federal individual income tax revenue is down a lot since last summer but is still 15% higher in real terms than before the pandemic. New York’s personal income tax revenue is almost 17% lower.
Why do people leave New York? In 2020, it was pretty obvious — New York City was for a time the epicenter of a global pandemic, and after that the state as a whole remained more cautious about Covid-19 than many places to the west and south, resulting in steeper job losses and a slower recovery. More generally, it can get pretty cold in New York and, outside of the New York City metropolitan area, the state hasn’t exactly been a land of opportunity in recent decades. Inside the New York City metro area, the cost of living is high, and taxes are high statewide — the highest in the country, in fact, with the right-leaning Tax Foundation putting New York’s 2022 state and local tax burden (state and local taxes paid by a state’s residents divided by that state’s share of net national product) at 15.9%. New York’s taxes are also somewhat regressive, with the left-leaning Institute on Taxation and Economic Policy estimating that those making less than $19,400 as of 2015 in New York faced a slightly higher overall state and local tax rate than those making more than $780,000, with rates the highest for those making $60,900 to $107,600.
The role of taxes in driving interstate migration is often exaggerated, but it’s not nothing. In a couple of recent papers, Joshua Rauh of the Stanford Graduate School of Business has shown that the percentage of very-high-income taxpayers leaving California jumped in the wake of (1) a 2013 increase in the state’s top income tax rate, (2) the 2017 Tax Cuts and Job Act’s curtailing of state and local tax deductions and (3) the pandemic. Still, that’s not many people, and for years those leaving California and New York have been mainly lower- and middle-income residents for whom expensive housing and other cost-of-living issues probably played a bigger role than tax rates per se.
In New York, the initial pandemic exodus was led by those who could afford to leave quickly and could work remotely. The composition seems to have shifted since then, with affluent Manhattan gaining population from mid-2021 to mid-2022, according to Census Bureau estimates, and the state’s poorest county, the Bronx, losing the biggest percentage of population. (The recent New York Times analysis showing an accelerating exodus of college graduates from the New York City metro area relies on different Census numbers that aren’t available yet for 2022.) New York has been finding all sorts of different ways to drive away all sorts of different people — and it looks as if that’s about to start seriously hampering the state’s ability to pay its bills.
More From Bloomberg Opinion:
• How 2022 Became a Record Year for US Income Taxes: Justin Fox
• Wealthy People Can’t Pay for All Biden Wants: Allison Schrager
• New York City’s Jobs Recovery Is Still Unbalanced: Justin Fox
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Justin Fox is a Bloomberg Opinion columnist covering business. A former editorial director of Harvard Business Review, he has written for Time, Fortune and American Banker. He is author of “The Myth of the Rational Market.”
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