Recently released migration data from the IRS show that states with lower taxes continue to gain residents from higher-tax states. According to an analysis from the National Taxpayers Union Foundation, from 2019 to 2020, the high-tax states New York, California, and Illinois lost more than 600,000 people combined, while low-tax Florida, Texas, and Arizona gained a total of 380,000 new residents.
Taxes aren’t the only reason people move, but they are certainly a factor. Research shows that workers, inventors, and businesses are all sensitive to tax burdens and will choose lower-tax jurisdictions when possible. California has one of the heaviest tax burdens in the country, and in recent years, the state has lost more than 260 business headquarters and hundreds of thousands of people to outmigration.
The substantial migration of economic activity from high-tax to low-tax states is likely to accelerate over the coming years, as remote work makes it easier for workers and businesses to locate anywhere. But given the various tax rules that exist across the states, such moves are not without complications.
A recent McKinsey study on the prevalence of remote work found that nearly 60 percent of Americans now work from home at least one day a week, while 35 percent do so every day. Almost 90 percent of Americans say that they would sometimes work from home if given the choice.
Enthusiasm for working from home is probably even higher since some respondents likely failed to consider the potential tax savings from moving to a lower-tax jurisdiction. You can see the financial impact of moving to a lower-tax state in the Forbes Income Tax Calculator. The difference in after-tax income may surprise you: someone earning $150,000 in Texas keeps almost $15,000 more than a similarly situated person in California. With those kinds of savings, plus a lower cost of living, a move looks pretty tempting.
While working out of state is now easier for many employees, it can be tough on employers. Typically, having out-of-state customers isn’t enough to trigger a tax liability. For example, a company located in Ohio is typically not taxed by Kentucky for sales to Kentucky residents. But the majority of states take the position that, if an employee telecommutes from another state, then that state can tax the company’s income connected to the state. For instance, if an Ohio company employs a worker telecommuting from Kentucky, then that company’s sales to Kentucky residents may suddenly be subject to Kentucky taxes.
This can create headaches, since states have odd ways of deciding how much income is connected to a resident’s work. If the employee telecommutes from a state with many of the company’s customers, the result can be a dramatic tax bill when there otherwise would have been none. During Covid, some states adopted temporary “remote work” waiver rules, but many of those policies have expired. “It’s a real balance of employer and employee benefits. For my previous company, the distributed workforce model made sense in many ways,” says Jason Moungey of Structured Software.
While tax savings can be significant, relocating a business is not without risk. “Which side of the state line you live on can dramatically change your tax rate,” says CPA Deborah Hresko of C&L Value Advisors. “But if you’re thinking of moving to the other side, make sure you’re thinking of what’s not moving.” For tax purposes, many states not only consider your new home address but also whether you truly moved, including whether you still have “significant contacts” in your old state. Some states aggressively search “property records and other public records” to discover a business’s true whereabouts. Depending on the nature of the move, a state may still be able to collect income, estate, and sales taxes from a relocated business.
Remote work provides flexibility to employers and employees alike; businesses can relocate even when employees wish to stay put. Such relocations often occur for tax reasons, but high-tax states also tend to be high-regulation states, giving businesses even more reasons to seek greener pastures.
Of course, moving can be a significant project and distract from a business’s day-to-day operations. In addition to the logistics, which can be overwhelming, companies face many legal decisions along the way. How do you report to the old and new states’ taxing authorities? From a legal perspective, do you convert, merge, or transfer interests in the business? What service-provider contracts will be affected?
And of course, the tax burdens need to be compared across potential destinations. States vary in how they calculate the taxable portion of a business’s income. Often, a state taxes a percentage of the business’s income based on the portion of its property, payroll, and sales attributable to that state. All else held equal, a business benefits by moving to a state that will tax a lower percentage of its income.
Another option: moving to a heavily subsidized jurisdiction. In Puerto Rico, for instance, firms that provide services to the mainland are barely taxed. Roberto Santos, tax lawyer at Trusts & Taxes, says, “A company can move to PR and cut their tax rate from over 40% to 4%.” After moving Establish PR’s headquarters to Puerto Rico, co-founder Michael Hummel says, “It’s not a quick move but we’ve now heavily invested in our growth with the taxes we saved.”
The choice of staying or moving presents pros and cons for both employers and employees, and many of the considerations are dependent on other factors. Accounting and consulting firms will focus on different benefits, so prudent companies should consider consulting advisors who know their people, demands, and resources.
Policy also matters, and both firms and employees considering moves should review the state and local policies of potential destinations. Some states, such as New York, tax remote workers who work as little as one day in their state—so an out-of-state worker who frequently travels to the office may be on the hook for taxes in two states.
For individuals and businesses, the key first step in any move is considering everything involved. Will the company stretch itself too thin? Will a distributed workforce be effective? Will an employee’s family support the move? If moving ultimately makes sense, significant tax savings are possible. And with greater acceptance of remote work, achieving such savings is easier than ever.