If one were to look for a prime illustration of why income tax rates matter, there would be no need to look any further than the 2020 Census and the resulting changes to the states congressional seats.
The U.S. Census Bureau just announced its much anticipated list of state winners and losers from the official 2020 apportionment count. With good reason, this is a huge news item for policymakers in Washington and the 50 state capitals, as the news brings with it major implications for not only the long term, but also the 2022 congressional midterms, state political clout and future presidential elections. Based on changes in population, various states will either gain additional congressional seats, lose them or keep the same amount.
Additional seats bring additional representation in Congress, the excitement of adding new blood to the legislative body and open seat elections and represent growth of population in a state due to economic growth and inmigration. On the other hand, losses of seats indicate a decline in population and residents voting with their feet – by pulling up their stakes and moving elsewhere possibly in search of jobs, better living conditions or more favorable tax treatment. In fact, it means that an elected official will be “out of a job”. No more office, staff or anything that goes along with it.
Beyond the media attention that will focus on the political ramifications of these changes is the real story that the 2020 census tells: Americans continue to “vote with their feet” and move towards states that have lower income tax rates and lower overall tax burdens.
Texas is the big winner as the only state to gain 2 additional seats. Texas boasts an income tax rate of 0% with an income tax being prohibited by its state constitution and offers a robust free market policy environment that encourages and rewards growth. Headlines that announce large corporations and wealth relocating to the Lonestar state are plentiful. The other states that gained congressional seats this round including Florida, North Carolina and Colorado have been aggressively lowering their income tax rates and cultivating a business friendly environment. Florida has no income tax and North Carolina has cut their individual income tax rate from 7.75% in 2010 to a flat 5.25% in 2021 and their corporate income tax rate from 6.9% in 2010 to 2.5% in 2021. Even Colorado got in on the action by recently cutting their income tax rate down to 4.55% with a ballot initiative that passed last November.
Just as obvious as the trend towards states with low tax rates is the exodus from states with high tax rates. For example, some of the states losing congressional seats including Illinois, Michigan, Pennsylvania, New York and California are already going in the opposite direction or already have very high tax rates. In 2017, Illinois raised their income tax rate from 3.75% to 4.95% (that is a 32% tax hike for those counting at home). While Michigan has a flat 4.25% individual tax rate, they single out corporations with a higher 6% rate. Pennsylvania has one of the highest corporate income tax rates in the country, hitting corporations with a hefty 9.99% tax. New York just hiked their corporate income tax rate from 6.25% to 7.5% and their highest marginal individual income tax rate to 10.9% for its top income earners, right during the pandemic. California wins the prize for the highest individual income tax rate that tops out at 13.3% in 2021 and a high corporate tax rate of 8.84%.
One of the most significant stories from the Census report is that of California. For the first time in state history, the Golden State will lose a congressional seat. California continues suffering a mass exodus due to taxpayers voting with their feet across state lines. Net domestic outmigration, the hundreds of thousands of former California residents who have departed for one of the 49 other states, is the driving factor for the loss of their congressional seat. Californians are leaving behind high taxes, unaffordable living and draconian government lockdowns. Texas is the largest recipient, with an estimated 86,000 former Californians moving to the Lone Star State in 2018 alone.
Finally, perhaps the most sobering fact that comes out of this report in 2020 is related to New York. Back in 1940, New York had 45 congressional seats. After losing yet another seat this time around they will begin this decade with only 26 seats. That is a loss of almost half of its representation in Congress over the last 70 years, once again proving that income tax rates and tax burden on residents and businesses truly matter.