New Jersey and New York have consistently found themselves at the bottom of the list regarding business tax climates, as revealed by a recent analysis from the Tax Foundation.
These rankings have persisted for several years, with New Jersey holding the unenviable last place since 2018 and New York not far behind, at 49th place since 2019.
The consequences of these dismal rankings drive people out of these states in search of more tax-friendly destinations, making reform a pressing necessity.
The Tax Foundation’s analysis reveals that the lowest-ranked states share common challenges: complex, distortionary taxes with high rates.
In the case of New Jersey, residents contend with one of the highest property tax burdens in the country, coupled with elevated corporate and individual income tax rates.
Meanwhile, New York’s income tax code ranks at the bottom due to its complexity and high speeds, and its property tax rank could be better at 49th place.
However, New York performs relatively better regarding its corporate income tax, landing in the 24th spot. Both states fall closer to the middle in unemployment insurance taxes, ranking 37th and 39th, respectively.
State business taxes have a profound influence on economic growth and migration patterns. A recent analysis of IRS data by the Economic Innovation Group (EIG) revealed that New Jersey and New York were among the states hit hardest in terms of adjusted gross income (AGI) flows during the pandemic.
New Jersey saw a net loss of $3.8 billion in AGI, with Florida emerging as the largest recipient.
Florida’s Tax-Friendly Haven
New York’s losses were even more staggering, with a net AGI outflow of $24.5 billion, with Florida again being the primary beneficiary, receiving $9.8 billion in AGI.
Florida stands out as the 4th-ranked state regarding business tax climate, providing a clear alternative for those seeking tax relief.
At the local level, Manhattan bore the brunt of the losses, with $16.5 billion in AGI outflows to other states. Notably, Florida featured prominently as the destination for those departing from New York City, with Miami-Dade County and Palm Beach County reaping the benefits.
Research consistently supports that net migration tends to be higher in states with lower tax rates. A 2022 study from the Baker Institute at Rice University by Jorge Barro underscores this connection, demonstrating that net migration rates and net AGI flows are inversely related to top marginal income tax rates at the state level.
As Barro observes, “Lower state income taxation is shown to be associated with higher net taxpayer migration—a relationship that grows stronger with income.”
In light of these findings and the significant outflows of AGI from high-tax states like New Jersey and New York, the urgent need for tax reform is clear.
Both forms must reevaluate their tax structures to attract and retain residents, foster economic growth, and improve their business tax climate rankings.
Failure to do so could perpetuate the exodus of residents to more tax-friendly states, with Florida serving as a prime example of the appeal of a lower-tax environment.
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