Adam Chodos, Esq. CPA
Millions reside in high tax states because of traditional advantages; higher earning potential, quality employees and service providers, major airports, culture, great schools, and strong real estate markets. That has shifted dramatically in the last few years, accelerated by the recent tax trends. More high net worth people, and their businesses, are relocating to low/no tax states as the effective cost of high tax states has escalated, tipping the scales.
Tax loads have risen with high tax states taxing even deeper into their remaining resident base. This is exacerbated by the fact that state and local taxes are not fully deductible anymore; currently capped at $10k. The deduction limit raises the true cost of living in a high tax state. For example, a family in Greenwich, Connecticut with taxable income of $1M (state tax liability of $70k) and real estate taxes of $45k. When fully deductible the true cost was $69k. With only $10k deductible, the true cost rises to $110k.
While most would like lower taxes, there is a practical limit to how far one will go. There are tax incentive plans for U.S. territories (U.S.V.I and Puerto Rico) promising major tax savings if you relocate, hire locals, and invest locally. Some tax averse families have gone as far as expatriating, voluntarily giving up U.S. citizenship, to move to a low/no tax nation. But these programs are extreme as it requires a dramatic life shift. For a business, many of the current employees would not be willing to change to a new territory or country. Obtaining high quality business support is a challenge in these regions (lower quality employees, less reliable infrastructure, less reliable government). The recent natural disaster in Puerto Rico was a stark example of how lesser developed regions are ill-prepared to cope and have fewer resources. While it may seem alluring to move to a Caribbean island, few active businesspeople can tolerate the slow pace for long.
The simplest option became the plan for most – move from a high tax state (New York, New Jersey, Connecticut, Illinois, California, Massachusetts, Oregon) to a low/no tax state (Florida, Texas, Nevada, South Dakota, Wyoming). The most popular destinations are Florida, Texas, Nevada and Arizona (not the lowest tax state but much less than the high tax states). Some of the low/no tax states have not received much attention as the sophistication and business needs are not present (South Dakota, Wyoming). The advantages of the high tax states have been lost over the years as many of the destination states (Florida and Texas in particular) have caught up in terms of refinement, good schools, quality employees and service providers, favorable homestead laws, international airports, restaurants, arts and cultural centers, and much better climates.
Years ago, Texas and Florida were considered retirement locations and perhaps nursing home havens. Over the past decade, they have become fully developed destinations with no state income tax. Rather than coming for the sun, people come for the tax relief. The sun doesn’t hurt though.
Adam Chodos Esq.
(c) Chodos & Associates, LLC
