The Blue State Blues

None of it should come as a surprise. If you're a New Yorker, you will probably find the news redundant. As the city builds and builds, as it attracts more and more high tech millennials, members of the upper middle class talk ceaselessly about leaving town. The high cost of living, especially but not only of real estate... along with what must surely count among the nation’s highest tax bills… whatever New York offers seems hardly to be worth the price. 

Now, with the new tax reform bill, upper income New Yorkers, especially those who own property, are being hit with an extra tax burden. More and more New Yorkers are deciding that it's time to go.

Increasingly, New York has become a city of the rich and the rest. As the middle class hollows out, we are left with armies of very poor people and a smaller contingent of very rich people. The subway system is an embarrassment. It is ugly and dirty and noisy; it often fails to run on time. New York is not as dangerous as parts of Chicago. It is not as appalling as parts of Los Angeles and San Francisco. And yet, how long before it becomes unlivable, except for those who can lay down heavy money to shield themselves from its underside.

In a column for The Hill, New Yorker Kristen Tate describes living in New York City:

Am I the only one moving through the greater part of New York City boroughs and seeing an inexorable march of urban decay matched with the discomfort of crowding and inexplicable costs? I know I am not.

New York is the most expensive city in America. Its lower-cost neighborhoods are riddled with crime and homelessness. Its public schools, some of which are among the worst in the nation, look more like prisons than places of learning.

For the record, New York’s upper middle class and even many members of its middle class l never send their children to the city’s public schools. The might live in a studio apartment; they might eat ramen noodles three times a day. They will do anything to keep their children out of New York's public schools.

This produces a de facto segregation, to the point that the Economist remarked that only 15% of the city’s public schools are racially integrated. New York is filled with liberal minded progressives who will march in the streets to demand racial justice, but who will never, ever send their children to a racially integrated city public school. Their attitude: for thee, but not for me.

Quality of life is a major problem for many New Yorkers. Bringing up their children is another. And yet, as Tate and many others point out, another major problem is taxes. People leave town to escape punitive taxes. No one knows where all the tax revenue is going, but for sure it is not going into the subway system:

Eventually, city and state taxes, fees, and regulations become so burdensome that people and corporations jump ship. More people are currently fleeing New York than any other metropolitan area in the nation. More than 1 million people have moved out of New York City since 2010 in search of greener pastures, which amounts to a negative net migration rate of 4.4 percent.

The new tax reform has made life more expensive for wealthy New Yorkers, especially those who own high priced condos. As of now, construction is booming. And yet, prices at the high end of the market have been declining.  Repealing the state and local tax deduction will cost people significant amounts of money. And it will make that mass of new condos more difficult to sell. At some point the construction boom will bust. It's inevitable. No one knows when or how bad... but it will come.

Tate explains:

The recently passed tax bill, which repeals the state and local tax (SALT)deduction, will only speed up the exodus. Thanks to the bill’s passage, many New York taxpayers will save little or nothing despite a cut in the federal rate. The state’s highest earners — who have been footing an outsized share of the bill — will pay tens of thousands of dollars more in income taxes in 2018. In New York alone, loss of the SALT deduction will remove $72 billion a year in tax deductions and affect 3.4 million residents.  

Republicans will tell you that the new tax reform ends an injustice. When New Yorkers were allowed to deduct state and local taxes they were paying less federal taxes. Thus, their profligacy was being subsidized by states that did not have their own income taxes. Arthur Laffer and Stephen Moore explained it today in the Wall Street Journal:

For years blue states have exported a third or more of their tax burden to residents of other states. In places like California, where the top income-tax rate exceeds 13%, that tax could be deducted on a federal return. Now that deduction for state and local taxes will be capped at $10,000 per family.

Consider what this means if you’re a high-income earner in Silicon Valley or Hollywood. The top tax rate that you actually pay just jumped from about 8.5% to 13%. Similar figures hold if you live in Manhattan, once New York City’s income tax is factored in. If you earn $10 million or more, your taxes might increase a whopping 50%.

And that’s not all, folks. Tate explains that these high tax cities are being mismanaged and poorly governed. It's not just that they collect too much. They waste a great deal of it. In her words:

New York, Los Angeles, Chicago — the places where power and capital have traditionally congregated — have become so over-regulated, so overpriced and mismanaged, and so morally bankrupt and soft on crime that people are leaving in droves. Of course, these high-tax cities are the same places hit hardest by the removal of the SALT deduction.

The situation in California is just as bad:

In fact, in 2016 the Golden State lost almost 143,000 net residents to other states — that figure is an 11 percent increase from 2015. Between 2005 and 2015, Los Angeles and San Francisco alone lost 250,000 residents. The largest socioeconomic segment moving from California is the upper-middle class. The state is home to some of the most burdensome taxes and regulations in the nation. Meanwhile, its social engineering — from green energy to wealth redistribution — have made many working families poorer. As California begins its long decline, the influx outward is picking up in earnest.

As you know, and as Laffer and Moore remind us, this has been happening for at least ten years now. States like Texas and Florida have been profiting from the great exodus our of blue states:

Since 2007 Texas and Florida (with no income tax) have gained 1.4 million and 850,000 residents, respectively, from other states. California and New York have jointly lost more than 2.2 million residents. Our analysis of IRS data on tax returns shows that in the past three years alone, Texas and Florida have gained a net $50 billion in income and purchasing power from other states, while California and New York have surrendered a net $23 billion.

And also:

We estimate, based on the historical relationship between tax rates and migration patterns, that the pace of out-migration from California and New York will soon double—with about 800,000 net out-migrants each of the next three years. Our calculations suggest that Connecticut, New Jersey and Minnesota combined will hemorrhage another roughly 500,000 people in the same period.

Of course, there’s a fly in the ointment. When blue state citizens move to red states, will they bring their blue state values with them? Will they cling to their bad attitudes and vote for the same policies they championed in their blue states?