Marginal rates in high-tax states will undoubtedly rise because of the economic impact of the COVID-19 pandemic, but wealthy residents may not flee as a result, according to two Pimco muni market analysts.
Related: Tax Planning in an Election Year
Sean McCarthy, head of Pimco’s the municipal credit research team, and Tom Schuette, the co-head of Investment Research and Strategy at Gurtin Municipal Bond Management, a Pimco company, wrote in a recent blog post that even though the risk of future out-migration from higher-tax states still exists, “individual mobility is often overstated.” Taxpayers, they explain, are often reluctant to leave jobs, abandon cultural institutions or pull their children from school despite state tax increases.
“Each year, approximately 1% to 2% of Americans move across state borders, [but] the majority cite employment and family as their primary motivation — not higher income taxes,” according to the analysts.
They also note that academic research on the subject is inconclusive, with studies focused primarily on California and New Jersey finding limited migration from high-tax to lower tax states, especially by wealthy residents.
New and Proposed State Tax Hikes
Several states have proposed or instituted higher taxes on wealthy residents.
New Jersey recently implemented a 20% increase in personal income tax rate for residents earning between $1 million and $5 million to 10.75%, creating parity with the rate already charged to residents earning more than $5 million.