Three blue states that faced massive population exodus this past year: New York, California, and Illinois, are also poised to be hit hard by the federal tax reform bill that limits state and local tax deductions. These states have declining populations and big tax bills. What’s often overlooked in the debate over federal tax policy is how high-tax state and local governments decrease the number of people and companies that choose to do business in their localities.
These three blue states—which hemorrhaged nearly 450,000 people in 2016 and 2017—are perfect examples of how high costs and high taxes lead to population loss.
Take New York, which lost about 190,000 people between July 1, 2016, and July 1, 2017, according to U.S. Census Bureau data. This exodus roughly matches the number of people that left New York in previous years dating all the way back to 2010. In a bid to entice educated workers to stay, Governor Cuomo decided to offer tuition-free college to New York residents as long as they remain the number of years they’ve received funding. This is important for state coffers, as taxpayers—particularly high-earning ones—are fleeing New York in droves.
One hundred and thirty-eight thousand Californians left the Golden State from July 2016 to July 2017, putting California in second place behind New York for out-migration. For the past two decades, California has been sending more people to other states than it receives. Between 1990 and 2012, California lost nearly 3.4 million residents. Despite the population loss, the state’s budget has not appeared to suffer, partially because of a large foreign migrant population entering the state, and also because California relies heavily on income and capital gains taxes on the very wealthy.
New York and California aren’t the only blue states with a disappearing tax base. Nearly 115,000 Illinois residents left for other states between July 2016 and July 2017, the state’s fourth consecutive year of population decline. Faced with state budget pension shortfalls and epic tax hikes, around 650,000 Illinoisans have fled to other states since 2010, according to the Illinois Policy Institute.
Population decline means there are fewer taxpayers to pay the state’s bills, which only compounds state budget problems, as Orphe Divounguy, chief economist with the Illinois Policy Institute, pointed out. “It’s worrying because if you have a declining population and a declining labor force, you will for sure have a further slowdown of economic activity going into 2018.”
This echoes what happened in Detroit, Michigan during the nineties and early aughts. After decades of tax hikes imposed at both the state and city level, Detroit never cut its ever-growing liabilities. The city ended up with between $18-20 billion in unfunded pension and health care liabilities by the time it filed for Chapter 9 bankruptcy in July, 2013 or an amount that was roughly equal to 176 percent of the annual per capita income. Detroit’s failure was historic; it was the largest municipal bankruptcy in U.S. history, and it should provide a cautionary tale to state lawmakers.
Be warned: This is what the blue state panacea—massive tax hikes, combined with lavish public spending—can reap.