Why businesses and taxpayers are fleeing blue states
Progressive government can’t abuse businesses and taxpayers with impunity. Employers can and will leave.
The Great Covid Business Migration: States with onerous lockdowns lost employers as well as workers.
WSJ Opinion Potomac Watch / June 10, 2023
We’ve chronicled the pandemic population flight from states with high taxes and high living costs that also imposed excessive lockdowns. A new report from the Bureau of Labor Statistics (BLS) shows that small businesses also left town.
The bureau examined trends in single-establishment business migration since the early 1990s using data from its quarterly census on employment and wages. It found that while migration fell during the 2001 and 2007-2009 economic downturns as business activity generally slowed, moves accelerated during the Covid lockdowns.
BLS counted 6,384 businesses in 2021 that had moved across state lines during the prior year, up from 5,524 in 2020 and 3,677 in 2010. Net migration to the South and from the Northeast doubled between 2020 and 2021. After gaining businesses from other states for most of the last three decades, the West lost a net 175 in 2021—mostly from California.
New York led in net business out-migration (487), followed by California (456), Illinois (208), Maryland (50) and Pennsylvania (33). Florida (399), North Carolina (148), Nevada (103), Texas (103) and Tennessee (92) drew the most businesses from other states. All besides North Carolina have no income tax.
These figures probably underestimate the business migration that occurred early in the pandemic since they don’t capture larger firms shifting headquarters or workforces to other states. Texas saw a spike in headquarter relocations in 2020 (42) and 2021 (80), more than half of which came from California.
Small businesses in professional, scientific, and technical services such as law, accounting, and consulting firms led the cross-state migration. There was also a large uptick in movement by finance firms such as small family investment offices. These businesses are more mobile since they don’t have a lot of specialized equipment.
They also tend to be more sensitive to tax policy because they employ higher earners. They are usually structured as pass-throughs under the tax code, so owners pay tax on earnings at individual income-tax rates—meaning a top marginal rate of 13.3% in California and 14.8% in New York City (up from 12.7% in 2020).
Another new study this week from SmartAsset estimated that an individual earning $200,000 in Manhattan would save $64,567 in taxes and the cost of living by moving to Miami, while someone making $650,000 would come out ahead by $195,076. Higher earners in San Francisco would save about 25% of their income by moving to Miami.
High taxes and business costs along with burdensome regulation aren’t new in progressive states, but their onerous lockdowns were especially hard on employers and workers. Some may have been considering a move before the pandemic struck but were pushed over the edge by virus restrictions.
One result is turmoil in commercial real estate in New York City, San Francisco and Chicago. Another is persistent higher unemployment in California (4.5%), Illinois (4.2%) and New York (4%), compared to a national average of 3.7% and 2.6% in Florida. Unemployment in New York City is three times higher than in Miami.
Progressive government can’t abuse businesses and taxpayers with impunity. Employers can and will leave.
Regulations and mandatory reporting, which are often federal rather than state, add to small business costs. Large corporations have economies of scale to address all the regulations, small businesses don't. Thus, cost savings by operating in a low/no-tax state is a significant advantage particularly when the small business serves customers in multiple states.
Similarly, the proposed international minimum tax hurts all companies. While the current administration claims an international minimum tax prevents a 'race to the bottom' it also reduces exports/import trade and the opportunity for corporations to grow through cost minimization. and business innovation. If the Europeans want a minimum tax, that's their decision; it should not be a reason for the US to follow. In addition, Congress is responsible for taxing. Delegating taxing authority to a non-US entity (or to the Secretary of Treasury) is a violation of the US Constitution.
The bureaucrats in the federal government need to pay attention to their duties and focus on improving value for US Citizens rather than themselves.