Taxation Migration

By MIKE MANNO

In case your Christmas parties, bowl games, and New Year’s planning took your attention away from national politics, this may come as a surprise: President Trump got his tax cut plan approved and signed into law.
Now you would think that a tax cut would be very popular, but because the Democrats don’t approve, mainly because they don’t approve of Mr. Trump, and the media tirelessly report and echo what the Dems think, the bill was not popular. We’ll leave the finer points of that argument to the tax experts, but one of the shots taken was that the bill penalizes residents of states with already high tax rates.
The complaint that it hurts residents of high-tax states is because of the changes in deductibility rules for state and local taxes on the IRS 1040. The argument presented is that by reducing someone’s ability to deduct state taxes from his federal return, it will cause an increase in taxes for some in high tax states and thus there will be a migration of taxpayers from those states to lower tax states.
Setting aside the finer points of deductibility and offsets in Mr. Trump’s tax plan for another time, the argument about high tax vs. low tax states does have some merit. What is overlooked in the argument is that the “low tax migration” has been going on for years without the help of a new tax bill. And it continues despite the complaints of high tax state politicians that people are moving for other reasons.
Case in point is Florida, a very low tax state. The IRS’s tax and migration numbers for 2015 show a continuing trend of movement into Florida, a net inflow of $17.4 billion in adjusted gross incomes. Yet the claims by politicians with blinders are that retirees are moving there to escape the harsh winters up north. True to an extent, but only to an extent: The IRS reports that during that same period nearly 70,000 tax filers between the ages of 26 and 35 moved into the state.
That is some 10,000 more people than the 55 and over crowd and represented the biggest migration of new Floridians by demographic group.
Statistics show that the “tax migration” issue is a real one and numerous other low tax states are the beneficiaries of it, such as Texas and South Carolina. The losers most frequently mentioned in the high state category include New York (1.4 million outflow during the last ten years), New Jersey (500,000 outflow), Illinois (650,000 outflow), California (1.25 million outflow), and Michigan (600,000 outflow).
So what is it that sets the high tax states apart? I have a humble suggestion: Corruption. And part of the corruption is illustrated by the problem of underfunded pension plans for public sector employees. In their rush to curry the favor of public employee unions, politicians used pension benefit increases and deferred the costs. Thus they failed to put enough in reserve to cover the payments when due; the state of California alone has up to $750 billion in unfunded pension debt.
To justify their plans and capital outlays, politicians assumed an investment rate of 7.5 to 8 percent or more, which was unreasonable. Lawrence McQuillan, a senior fellow at the Independent Institute, said recently, “The bottom line is that if they used the same pension fund assumptions to calculate the unfunded debt in the private sector that they do in the public sector, the private sector pension fund managers would be in prison.”
Financial Sense reports that the problem is so bad in some areas that money is being transferred from police, fire, schools, roads, and other funds to make up the shortage.
Then, of course, there is the absurdity of politicians trying to use tax and pension dollars to benefit their friends. There is probably no example of this better than Illinois where two union organizers for the Federation of Teachers were allowed to substitute teach for one day and receive over $100,000 in lifetime state pension funds.
Steven Preckwinkle and David Piccioli were the union representatives. They were given a heads-up that under the terms of proposed legislation union officials would be able to join the Teachers Retirement System (TRS) and be eligible for a state pension if they obtained teaching credentials and taught for at least one day prior to the governor signing the bill.
They did so, the bill was signed by Gov. Blagojevich, and thus they became eligible for state pensions after teaching only one day because under the legislation they could count all their union service time as credit for their pension. This is in spite of the fact that as union employees they were private sector employees not paid by public funds. But now their pensions would be paid by taxpayers.
In 2014 Forbes received this explanation by the director of communications for the Illinois Teachers Retirement System:
“Prior to 2007, Mr. Preckwinkle and Mr. Piccioli had accumulated many years of service to the IFT [Illinois Federation of Teachers]. That year the legislature approved and the governor signed a bill that, essentially, allowed those two to join the TRS if they did what any member needs to do to become a TRS member — work one day as a licensed teacher. In addition, that 2007 law was written so that it allowed them, and only them, to claim all of the service they had accumulated with the IFT prior to joining the TRS in the calculation that would determine their initial pensions.”
Interestingly, one of the men actually went to court to double his annual pension, but a court had the good sense to throw that case out.
In Illinois there are five pension systems with over $200 billion in liability. Recently OpenTheBooks.com reported that 40 private sector union leaders from the National Education Association, Illinois Educational Association, and the Illinois Federation of Teachers were receiving $5,000,000 in Illinois teacher pensions.
There are abundant reasons why one state would have a higher tax bite then another, but I would suggest that this type of crony legislation, the use of generous pension plans to reward political allies, is an illegitimate one.
And, of course, the list of this type of cronyism could fill a book, a rather large book at that. The culprits are the politicians who are quick to reward friends and political supporters and kick financial responsibility down the road for others to confront.
For example, McQuillan noted for Financial Sense that in 1999 California approved the largest pension increase in history yet not one politician who voted for that increase is still in office today. In California the pension costs for just local governments have increased four times the level of tax revenue.
In Illinois the problem is that — like many other high tax states — it has been paying benefits to its retirees that are too high, and there are more retirees receiving pensions than employees who work for the state. A plan to reduce the benefits and for state pensioners to pay more into their pensions was rejected by the Illinois Supreme Court due to a 1970 constitutional change forbidding any changes to any pension plan or public union contract.
Now the finer points of these issues, defined plans vs. IRAs, tax deductions for state and local taxes, and so on, are fair game for comment, as is the question of how many of our great cities, such as Detroit, have gone bankrupt trying to pay for the decisions of corrupt politicians. The bottom line is this: Unless our political leaders can project more than pie-in-the-sky results they had better learn how to balance a checkbook and throw away their overextended credit cards.
Otherwise, the fiscally wise states will continue to outshine the unwise ones as jobs and people following them will flow there.
Of course, there is also a cautionary note: Voters need to pay more attention to these issues and not let their political parties lull them into the false comfort that all will have a rosy future. If not, we’ll soon find out that those roses they’re giving us do have real thorns.