2017 Tax Reform and Remote Work Push Workers To Move to Low Income Tax Rate States

Iowa Governor Kim Reynolds and the Iowa Legislature took the bold step of reducing the state’s income tax to a flat rate of 3.9%, thus joining 10 other states with some form of flat income tax. Critics have questioned the economic development wisdom of what they judge as a radical change which is argued will undermine the state’s ability to fund needed public services.

However, the passage of the 2017 federal tax reform bill, which limited the deduction of state and local taxes on federal income returns to $10,000 incentivized the migration of individuals from high to low-income tax rate states. Furthermore, Covid-19 freed workers to work remotely also encouraged workers to move from high to low-income tax rate states.

Not surprisingly, the 10 states with the highest income tax collections as a percent of GDP, excluding Kentucky and Oregon, lost a total of 1.8 million in population to migration between 2017 and 2021.

On the other hand, the 10 states with the lowest income tax collections as a percent of GDP, excluding Alaska, gained a total of 1.2 million in population to migration between 2017 and 2021. Tables 1 and 2 lists the highest 10 and lowest 10 income tax rate states using 2017 tax data. Ernie Goss