When Taxes Attack: Forced Out by High Taxes

Stephen Xavier moved his family and his consulting business to North Carolina from California nearly two years ago for one reason: taxes.

Bald Eagle
Werner Van Steen | The Image Bank | Getty Images
Bald Eagle

“The cost of doing business in California drove me out as it has driven out hundreds of other businesses — big and small — and thousands of long-time residents who were forced to move for lower taxes,” said Xavier.

His property taxes are slightly higher in North Carolina, but he said virtually every other tax and cost-of-living expense is far higher in California.

California’s personal income-tax rate can be up to 10.3 percent, one of the highest in the U.S., according to the Tax Foundation. By contrast, the rate is 7.75 percent in North Carolina. California’s corporate income-tax rate is 8.4 percent, compared with 6.9 percent in North Carolina.

More than 1 million people moved out of California between 2000 and 2008, the most recent period for which data are available, according to the Tax Foundation. Where did they go? The three top states were Arizona, Nevada and Texas — all low-tax states.

It’s not one specific type of tax — property tax or income tax, etc. — that's pushing people out, it’s the combined effect of being burdened by the government.

“Most Americans don’t differentiate between the taxes they’re paying,” said Scott Hodge, president of the Tax Foundation. “They just feel besieged from all directions by high income taxes, property taxes and sales taxes.”

Too-high taxes affect everyone from families on the brink to those working toward a fixed income and retirement — even high net-worth individuals struggle with taxes and “It becomes the straw that broke the camel’s back,” Hodge said.

The same migration that is going on out west, where taxpayers are moving from California to lower-tax states, is also going on elsewhere in the country, Hodge said. For the past 30 years, taxpayers have been moving away from high-tax areas like the Northeast and parts of the Midwest to lower-tax areas like the South and Southwest.

“It’s accelerated in recent years because of rather significant tax increases that we’ve seen in many of these states such as New York, New Jersey, California, Connecticut, Michigan and Illinois,” Hodge said.

New Jersey lost more than 300,000 residents between 2000 and 2008, according to Tax Foundation data, many of whom went to low-tax states like Florida and Pennsylvania.

Jerry Lynch, a financial adviser in Fairfield, NJ, said he sees it all the time in the Garden State, which has one of the highest personal income-tax rates (8.97 percent), one of the highest corporate income-tax rates (9 percent) and THE highest property-tax rate (1.89 percent).

“I often hear, ‘Once my kids get out of school, we are gone,'” Lynch said. “You can at least justify the high property taxes when you have kids using the school.”

Lynch said the other problem with high property taxes is that it often winds up pushing people into the Alternative Minimum Tax, which reduced the ability to deduct property taxes.

At a recent seminar about how to appeal property taxes, the town assessor of South Orange, NJ, said real estate agents come into her office all the time complaining about a home that they can’t sell because the property taxes are too high.

She said she used to make adjustments but got burned once and now doesn’t do that anymore.

And as states stare down gaping holes in their budgets, many of these hot-spot states with already-high taxes are actually choosing to raise some taxes. Illinois, for example, just raised state and corporate income taxes, and implemented an Internet sales tax, which has been dubbed “The Amazon Tax.”

Online-deal site FatWallet.com announced it’s moving its operations, and about 50 employees, to Wisconsin from Illinois due to the Internet tax. FatWallet spokesman Brent Shelton said he estimates the company will lose 30 to 40 percent of its revenue due to the tax, as customers would flee to businesses in other states that don’t impose such a tax.

Even industrial giant Caterpillar has threatened to move some of its operations out of Illinois due to recent tax increases.

Shelton said an Internet tax would make sense if it were national, “which Internet affiliates would be in favor of,” but “until then, it is a state of war for new business.”

“California, Illinois, states like these, certainly they are to the U.S. what Spain and Portugal are to the European Union,” Hodge said.

Some states, like New York and New Jersey, seem to be in a turnaround, Hodge said, as lawmakers work to put caps on some taxes. Even Rhode Island is taking some steps to relieve tax pressure.

But Lynch said he’s not confident that tax reform will happen in New Jersey and other states.

“There are too many moving parts,” he said. “You have a lot of unions, politicians and powerful lobbying groups with a vested interest in the status quo.”

“I am just hoping that someone in these legislative sessions would say, like my mom did when I was a kid, ‘But we can’t afford it!’”

More on Taxes: