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JohnP

A Possible “Tax Migration” ?

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From Ray Dalio 

 

I’m  personally not so sure. People may not be so quick to move as long as the tax differenctial is not huge. 

 

But an interesting read. Part of it here. 

 

 

 

While we have talked a lot about the effects of growing wealth and opportunity disparities in America, we haven’t talked enough about the tax migration that is taking place because of growing differences in state and local tax rates. This tax migration issue is especially important to focus on now because of the expected elimination (under the new tax legislation) of the deductibility of state and local taxes (SALT) against federal income taxes.

The dynamic that I’m referring to is the inevitable and self-reinforcing process in which those high SALT locations that a) have big disparities in income and fiscal shortfalls and b) can neither cut their financial supports to the “have-nots” (because their conditions are already unacceptably low) nor raise taxes on the “haves” (because they will move due to tax rates) suffer from tax migration. Of course, those low SALT locations with the opposite circumstances benefit from this migration.

The dynamic works as follows. As state and local tax rates and debts rise because there are shortfalls that can’t be narrowed, it is financially smart for high income taxpayers to escape these taxes and debt burdens by moving to lower tax and less indebted locations, so they do. As they do, property values decline, further raising the costs of staying in the high SALT location. In other words, the financial cost of being in one of those high tax locations equals the tax rate difference plus the property value decline, which can be substantial. Also, the reduced population of higher income and higher spending folks leads to reduced spending in these locations, which further depresses the high SALT economies. Also, the fiscal conditions of these locations suffer. Because both the remaining high income and low income folks are increasingly stressed and tend to blame the other, tensions rise, which makes these environments even more inhospitable, which further contributes to high income earners’ emigration. Realizing this, other locations increasingly appeal to the “haves” by offering tax incentives and creating environments in which they are more comfortable living with other “haves.” For these reasons, this “hollowing out” dynamic is self-reinforcing. Of course, the reverse is true in states that attack these rich tax migrants. This dynamic causes even greater polarity. Because the rich and the poor typically have different values, which are also reflected in different laws and different politics, it probably will make the polarity greater and conflicts even more intractable.

It appears to us that the expected new tax law that eliminates the state and local deductions against one’s federal income taxes will significantly contribute to this dynamic. Consider the fact that this change in SALT deductibility is one of the largest increased sources of revenue in the tax bill, accounting for nearly $1 trillion in new taxes over the next 10 years. In other words, it is expected that those people who stay in high tax states will pay nearly $1 trillion more to stay there. Of course, these changed rates will prompt more people in high SALT locations to consider moving. To the extent they do move, it would increasingly lead to more prosperous states that are occupied by, and cater to, more rich people and more depressed states that are occupied by, and cater to, more poor people, and increased polarity between them.

While we are talking about the tax migration, we see such location cost arbitrage motivated migrations happen all the time, so we should be well acquainted with them. For example, in New York City we saw migration from the Upper East Side to Downtown and then to Brooklyn brought about by cost arbitrages. Every area in the world has this sort of cost and desirability motivated migration going on constantly. Cost differences drive migrations that change the characters and costs of neighborhoods and happen in self-reinforcing ways until the cost differences change to make the newly hot neighborhoods expensive and other areas relatively cheap, so the immigration shifts to emigration.

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I have kids and grandkids.  We all live in the state of NJ.  My only reason for not migrating, at this time, are these family ties.  Otherwise, there would be no net incentive for staying here. 

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The high tax locations tend to also be cultural and entertainment hubs 

 

will be kind of hard giving up LincolnCenter for the local Comunity Center. 

 

And the social networking might not be as compelling either 

 

I don’t know how a rich couple from the upper east side  moves to Alabama  

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tax and social migration is what makes nice places to live decay.

 

For some reason, people who cant stand where they live dont see their voting habits as the cause.

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Once again, be the above scenario possible or not, this is what happens with the "Pretense of Knowledge" and a relatively few people legislating policy for all of us instead of letting the millions if not billions of individual decisions that people make everyday guiding the direction of society. There is no way in the world any small group of people to have enough knowledge to realize and anticipate the impact of a particular piece of legislated policy will have.

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2 mins ago, hamlet said:

tax and social migration is what makes nice places to live decay.

 

For some reason, people who cant stand where they live dont see their voting habits as the cause.

Ham, you painted a lot of people with one wide swath of your brush.  Hope you meant to say that "For some reason, some people who can't stand where they live don't see their voting habits as the cause."  In fact, I love many things about NJ.  Love.  Where I grew up in the Ironbound section of Newark was totally cool.  My grammar, high school, and college were all in Newark and within walking distance or a bus ride.  A subway ride to Branch Brook Park was neat.  Route 22 led to Route 78 and Round Valley Reservoir, Spruce Run Reservoir.  Easy peasy.  Go to a theater show at the Paper Mill Playhouse.  The Newark Museum and the Newark Public Library.  Spectacular places, really.  Easy access to Route 80 and the Delaware Water Gap.  I loved living in the Newark "metropolitan" area.  I could go on forever.  Then, I had to re-settle due to work.  Now I live in a semi-rural southern NJ town.  It is like living on a different planet.  Yet, I love it here too. It's now Home. But.  But.  Do I think the majority of politicians in Trenton or North Jersey care about me?  The state (NJ) has the 3rd highest cost of living in the US.  The financial incentive to migrate is overwhelming.  Trenton will not deal with it, however.  Just my opinion.

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15 mins ago, playhard said:

Ham, you painted a lot of people with one wide swath of your brush.  Hope you meant to say that "For some reason, some people who can't stand where they live don't see their voting habits as the cause."  In fact, I love many things about NJ.  Love.  Where I grew up in the Ironbound section of Newark was totally cool.  My grammar, high school, and college were all in Newark and within walking distance or a bus ride.  A subway ride to Branch Brook Park was neat.  Route 22 led to Route 78 and Round Valley Reservoir, Spruce Run Reservoir.  Easy peasy.  Go to a theater show at the Paper Mill Playhouse.  The Newark Museum and the Newark Public Library.  Spectacular places, really.  Easy access to Route 80 and the Delaware Water Gap.  I loved living in the Newark "metropolitan" area.  I could go on forever.

 

 

I could have typed this, and yes until I was about 24-25 I felt the same way. Perhaps could have been till I was 30, as circumstances led me to live in a similar area of the Boston Metro. But by the time I was 30 or so (1990), I had enough of that and moved to a semi-rural area, bought a house, and am done with all that stuff other than occasion visit.

 

How this relates to this thread, no clue.... :o by that just struck me is all. I guess I could say that I couldn't stand the environment nor the politics anymore and moved away. To me though, no matter where I live, in my eyes, the local, state and federal government is taking my money for things I don't consume, so might as well love where you live. :)

 

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I suspect the rich are more likely to simply move their permanent address than to actually move.  John's fictional upper east side couple would buy a house in Gulf Shores, Alabama and maintain a very expensive apartment in Manhattan.

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41 mins ago, Slacker said:

I suspect the rich are more likely to simply move their permanent address than to actually move.  John's fictional upper east side couple would buy a house in Gulf Shores, Alabama and maintain a very expensive apartment in Manhattan.

Already being done now with the NYC Resident income taxes.  A lot of wealthy Manhattan residents use their East End or South FL address as their permanent address to avoid paying the NYC resident income tax.

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53 mins ago, Slacker said:

I suspect the rich are more likely to simply move their permanent address than to actually move.  John's fictional upper east side couple would buy a house in Gulf Shores, Alabama and maintain a very expensive apartment in Manhattan.

I see that possibly happening. 

A lot of people will make their legal residence Florida   But if they have kids, not sure they’d want their kids to go to school in one of these more rural places  

 

Lots of consequences of a sweeping tax plan like this.  Nobody has considered it really 

 

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1 hour ago, playhard said:

Ham, you painted a lot of people with one wide swath of your brush.  Hope you meant to say that "For some reason, some people who can't stand where they live don't see their voting habits as the cause."  In fact, I love many things about NJ.  Love.  Where I grew up in the Ironbound section of Newark was totally cool.  My grammar, high school, and college were all in Newark and within walking distance or a bus ride.  A subway ride to Branch Brook Park was neat.  Route 22 led to Route 78 and Round Valley Reservoir, Spruce Run Reservoir.  Easy peasy.  Go to a theater show at the Paper Mill Playhouse.  The Newark Museum and the Newark Public Library.  Spectacular places, really.  Easy access to Route 80 and the Delaware Water Gap.  I loved living in the Newark "metropolitan" area.  I could go on forever.  Then, I had to re-settle due to work.  Now I live in a semi-rural southern NJ town.  It is like living on a different planet.  Yet, I love it here too. It's now Home. But.  But.  Do I think the majority of politicians in Trenton or North Jersey care about me?  The state (NJ) has the 3rd highest cost of living in the US.  The financial incentive to migrate is overwhelming.  Trenton will not deal with it, however.  Just my opinion.

Of course I did.

And Im pleased you love where you live.  None of it has anything to do with the point of my post.

You have not moved away and taken northern high tax big govt voting with you.

 

As have almost all the transplants from high tax states who have come here (NC) for example

 

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Maybe, but I bet most wouldn't relocate unless its for retirement purposes.  This is good incentive for those in high tax states to lobby them to decrease state spending.  If you're not going to be able to deduct them may as well tell your state you want them lowered to offset your loss. 

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3 hours ago, JohnP said:

 

The dynamic works as follows. As state and local tax rates and debts rise because there are shortfalls that can’t be narrowed,

You operate on a false premise here.

State and local taxes and debt rise because these areas/states have spendaholic liberals spending these places into the ground/bankruptcy.

 

The problem is OVER FREEKIN SPENDING!

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5 mins ago, Gotcow? said:

You operate on a false premise here.

State and local taxes and debt rise because these areas/states have spendaholic liberals spending these places into the ground/bankruptcy.

 

The problem is OVER FREEKIN SPENDING!

 

No I don’t operate on any false premise.

 

The guy who wrote this spends his time figuring out socio ecomimc trends, and Is now worth about 14 billion 

 

..but you know more, much more 

 

Do go on...

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