Sense of place trumps tax breaks in choosing where to live

There's no place like home.

Even when state-by-state income tax disparities make it profitable to move, high-wage earners seem to agree, according to new Cornell-led research.

Exploiting a natural experiment condition brought on by two separate happenings - a 2017 change in tax laws, and the COVID-19 pandemic three years later - researchers found that sense of place was more influential than financial advantage in determining where high earners choose to call home. Specifically, pandemic-induced disruption of people's way of life was more influential than tax laws in spurring movement.

"If you're going to move for tax purposes, you have to think realistically about what you're giving up on the other side of that," said Cristobal Young, associate professor of sociology in the College of Arts and Sciences. "And that's breaking away from connections that you've formed over your career. You probably know a lot of people and probably have family living nearby - these are the kinds of things that you end up giving up if you're going to move for tax purposes."

Young is co-author of "Taxing the Rich: How Incentives and Embeddedness Shape Millionaire Tax Flight," published in September in the American Journal of Sociology. Young's co-author is Ithai Lurie, a financial economist with the U.S. Department of the Treasury.

Using Internal Revenue Service administrative data, Young and Lurie examined tax filings of nearly 4 million people earning $1 million or more in annual salary, over a seven-year period. That timeframe included two years following the 2017 federal tax reform known as the Tax Cuts and Jobs Act (TCJA), signed into law by President Donald Trump, as well as two years following the start of the pandemic.

Young, the author of "The Myth of Millionaire Tax Flight: How Place Still Matters for the Rich," published in 2017, said popular opinion was that people in high-tax states such as New York, New Jersey and California were fleeing to states such as Florida and Texas, which levy no income tax.

Young and Lurie's dataset was massive - roughly 500,000 tax filings per year for people earning at least $1 million annually, a total of 3.9 million observations from 2016-23. They examined both the probability of moving and the choice of destination among the rich, documenting changes before and after both the tax reform and the onset of the pandemic.

The TCJA put a cap on the deduction tax filers could take for state and local taxes, which exposed more of their income to federal taxation and amplified the burden in high-tax states. This caused many observers, including the governors of high-tax states, to predict large-scale migration and fiscal crisis.

"Essentially, the Trump tax bill figured out a way to raise taxes on rich people in blue states," Young said, "and basically give new tax benefits to rich people in red states."

Three years later, the onset of the pandemic disrupted nearly every aspect of life that tied people to familiar surroundings: Schools and workplaces went remote, restaurants and other amenities shut down, and meeting people out in public became a health hazard.

"The pandemic took away a lot of the things that tie people to place," he said, "and also - with the rise of technologies like Zoom - made keeping connections alive over a long distances a lot easier on a day-to-day basis."

So one shock to the system changed the tax landscape, and the other changed the nature of people's social embeddedness. Which was more influential in terms of "millionaire flight"?

Without question, Young said, it was the latter.

"The Trump tax bill made the differences in taxes between states larger than we've ever seen," he said. "It was really a striking change - and what we saw from that was essentially zero migration."

Young noted that the few high earners who relocated did tend to favor lower-tax destinations.

During the pandemic, however, that changed. Looking at New York City, for example, out-migration during the early stages of the pandemic was five times higher than it was pre-pandemic. A similar pattern, though smaller in scale, occurred in the San Francisco Bay Area of California; in the red-state city of Houston, however, out-migration early in the pandemic actually dropped.

The authors relate the concept of "muted incentives" - clear financial motivations that nonetheless fail to elicit behavioral responses.

"State tax differences provide a prime example of muted incentives in normal times," the authors wrote in their conclusion. "Although top earners could significantly reduce their tax burdens by relocating to lower-tax states, few actually make this choice."

Support for this work came from the Washington Center for Equitable Growth; the Russell Sage Foundation; and the Cornell Center for Social Sciences.