In early April 2021, New York’s State Senate raised the income taxes collected on those with annual earnings above $1 million. The top marginal tax will be nearly 52%, the highest personal income tax rate in the U.S. The state Senate passed these tax increases in order to fund COVID-19 relief for renters and small businesses, address existing state budget deficits, and continue building out public services and social programs.
There are many nuances associated with the choice to raise taxes at a city level versus a federal level. When taxes are raised at a local level, residents have the potential to relocate to different regions of the country with lower taxes, in contrast to changes in federal taxes, where relocation does not change a person’s federal income tax rate. When residents leave a city, fewer individuals pay taxes, decreasing the total taxable population and potentially lowering total revenue. In addition to this economic consequence, there are political ones too. When people move, the political makeup of cities and states change, potentially strengthening party support for Democrats or Republicans in different states. People may dislike tax increases due to the decrease in individual spendable income, but people should also consider the adverse economic and political effects of increasing taxes as well.
The wealthiest two percent of residents in New York City contribute half of the city’s revenue, and in order for tax increases to have their intended effect, these people must stay and pay the taxes. However, many of these people are fleeing to cities and states with low or no income taxes. Florida, a state known for having no personal income tax, has experienced a population surge. According to Jimmy Patronis, Florida’s Chief Financial Officer, about 900 people a day are moving to Florida. Florida’s population grew by 2.7 million, or 14.6%, from 2010 to 2020, double the national average. Overall, New York has experienced a decline in its population. In addition to the migration due to tax increases, over 300,000 residents of New York filed a change of address during March 2020 through October 2020 due to concerns over living in New York City throughout COVID-19.
Beyond individuals, businesses are also relocating. The hedge fund Elliott Management is moving its headquarters to West Palm Beach, and Goldman Sachs Asset Management is considering moving its headquarters there as well. Miami’s Republican mayor, Francis Suarez, is actively recruiting businesses to move south. In an interview with CNBC, he stated, “Clearly, the toxic climate in New York has led businesses to look to Miami as an attractive place for long-term expansion and relocation.” New York City mayoral candidate Ray McGuire in an interview told the New York Post, “What [New York] is considering will push companies and higher-income families out of the city, which will cost us tax revenue and jobs.” The potential decrease in tax revenue is a concern of New York politicians and is a business opportunity for states with lower taxes.
Raising taxes also creates political consequences too. As people relocate to states with lower income taxes, populations decrease in states with higher income taxes. Lower income taxes are typically associated with red states, while higher income taxes are typically associated with blue states. Typically the people moving out of the state are Republican-leaning, leaving more Democrats and solidifying New York’s position as a Democratic stronghold. A result of this movement away from high-tax states, however, is that these states end up losing seats in the U.S. House of Representatives, ironically weakening these states’ positions on a national level.
Every ten years, seats in the House of Representatives must be redistributed among states according to their population according to Article I, Section 2 of the Constitution. This process is known as “apportionment,” and in recent decades Americans have been moving into states with lower or no income taxes, and coincidingly, Republican states. After the 2020 Congressional Apportionment, Texas and Florida — states known for being Republican and having zero income tax — gained two and one house seat, respectively. New York, on the other hand, lost a House seat. Once House seat count is determined, states must also undergo redistricting which often affects House elections. The effects of apportionment and redistricting typically begin two years after the census, in time for the next session of Congress. While losing or gaining one or two seats may seem inconsequential, the fact that these effects are taking place implies that even a small increase in the marginal tax rate of a city means that politicians need to consider the big-picture effects.
The economic and political consequences of the increase on the marginal income tax rate of New York City are apparent. Between a declining tax base and loss of Democratic representation, increased top marginal tax rates at a local level can have adverse effects. Gov. Andrew Cuomo and the state Senate likely considered these, but possibly deemed them secondary to their intention with the tax increases. For New York to lose one seat has a small effect on the overall distribution between seats in Republican and Democratic states, but New York is not alone in these tax increases. California is proposing raising top tax rates and also imposing a wealth tax. As more Democratic cities and states follow these trends, politicians should expect migrations out of blue states into red ones. In a society that values ease of mobilization, the consequences of a tax increase may very well be the opposite of the intended results.
Image by Luca Bravo is licensed under the Unsplash License.
