Federal Tax Law May Spur Business Relocations Among States

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Che Odom

The new federal tax law could lead to the relocation of businesses and shifts in population among states over the next few years.

Such changes could mean a boost for cities such as Nashville, Tenn.; Austin, Texas; and Charlotte, N.C., which have low tax rates and relatively cheap housing, to the detriment of cities in New York, Connecticut, New Jersey, California, and Illinois, according to some tax practitioners.

The movement in population may come as a result of changes in state business taxes and the treatment of carried interest in the works in a number of states.

However, the extent of such movement is uncertain, and studies have shown that taxes have had almost no impact on population shifts, according to some think tanks.

State Responses

States are responding differently to the sweeping 2017 federal tax act ( Pub. L. No. 115-97). This may cause “disequilibrium” among states that could encourage companies to cross borders, said Scott Roberti, executive director of indirect tax and state/local tax policy at Ernst & Young LLP.

“These differences are probably not great enough” to lure existing companies but may make a difference for investment and startups, Roberti said during a May 3 EY tax conference in New York.

“Under the old regime, states were at a equilibrium in that states had established their tax regimes in a way which created relative stability relative to the climate of capital across the states,” Roberti said. “Sometimes, with respect to certain sectors, states tended to have policies that benefited businesses” that were most important to them, within their boundaries.

“So the question now is, ‘Is this a destabilizing event?’” he said. “Does this create a disequilibrium across the states? And the states are in the position of having to review their competitive position vis-a-vis other states.”

So far, most states haven’t addressed the business-income provisions of the federal tax law, focusing first on individual income taxes.

Increased Revenue

Some states will take advantage of the base broadening provided by the new federal law to increase revenue, but this will have a minimal impact on whether states decide to relocate, Michael Leachman, director of state fiscal research at the liberal-leaning Center on Budget and Policy Priorities, told Bloomberg Tax.

“Is it true that they would leave in significant numbers?” Leachman said. “No, this has been studied extensively.”

But two economists, conservatives Arthur Laffer and Stephen Moore, predict that states, such as New Jersey, should expect residents to leave for states with lower tax burdens as a result of the federal tax law. The two wrote in the Wall Street Journal last month that New Jersey will lose about 800,000 residents who will be looking at the new tax landscape for places with lower marginal taxes.

Migration Worry ‘Overblown’

Such migration concerns are “overblown,” Carl Davis, research director at the liberal-leaning Institute on Taxation and Economic Policy, told Bloomberg Tax.

“High-income earners tend to move less often than everyone else because they are already living comfortably,” Davis said. “There is no need for them to uproot their lives in search of a tax savings that will not meaningfully impact their quality of life.”

Academic research shows that taxes don’t have a significant impact on migration, Davis said.

“There are too many other factors at play, and they matter much, much more in determining where people will choose to live,” he said. “Compared to all the other expenses involved in running a business, state and local taxes are a very small piece of the puzzle.”

Business owners tend to stay put because they have developed a network of strong ties to their local communities, Leachman said. “They are less likely to move than non-business owners,” he said.

To contact the reporter on this story: Che Odom in Washington at codom@bloombergtax.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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