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Competitive Threat on Maryland’s Border? West Virginians Plot Income Tax Repeal
In a single recent year, the 41 income tax states lost a net of 285,000 residents to the 9 states without an income tax
Since last November, a tax policy debate has played out on the other side of Maryland’s 174-mile border with West Virginia. That state’s Governor, Jim Justice, has launched a campaign to eliminate the state’s income tax. Although these efforts failed in this year’s legislative session, it was not because of a lack of support in principle. In addition to the Governor’s plan, both the Republican-controlled Senate and House leaders offered alternative approaches.[i] Undaunted by his failure this year, the Governor pledges to keep the issue alive. [ii]
Census numbers helped drive the Mountain State effort. Not only did the 2020 Census find that the state’s population dropped by 3.2% since 2010; it was the biggest percentage decrease among all states.[iii] In addition, West Virginia is the only state to have lost population over the past seven decades.[iv]
The West Virginians see an opportunity to reverse these long-term trends by becoming a low tax Mid-Atlantic destination for retirees and teleworking employees.
Eight states — Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming — do not have a state income tax. New Hampshire does not tax earned wages. Those jurisdictions without state income taxes have seen their populations grow at twice the national rate.[v] These state’s gross state product grew 56% faster than those with local income taxes. [vi] In a single recent year, the 41 income tax states lost a net of 285,000 residents to the nine states without an income tax. [vii]
Should Marylanders care?
Telework’s continued appeal post-pandemic seems likely to speed up this migration from high- to low-tax states.[viii] More workers once tied to a specific office location can choose to live wherever they wish. Consequently, those most sensitive to tax rates can now more easily relocate to lower tax burden communities. Similarly, employers will enjoy more location flexibility and use telepresence to attract employees outside their immediate geography.
West Virginia’s initial tax rate refugees are likely to be drawn from its immediate neighbors. In addition to Maryland, these include Kentucky, Ohio, Pennsylvania, and Virginia. Pittsburgh is only about 60 miles from Wheeling and 75 miles from Morgantown. Rockville, Hagerstown, and Frederick are short drives from the West Virginia border. Nearly 25,000 Maryland workers commute from West Virginia already. [ix] Of these five neighboring states, Maryland and its counties levy the highest income tax. Similarly, high housing prices in jurisdictions such as Montgomery County may attract residents seeking a lower cost of living.
Maryland’s capital region has long relied on its proximity to Washington DC as its engine for economic growth. First came government jobs. Over time, government support and related activities have driven regional growth.
The rise of remote work threatens to change this equation.
A highly compensated knowledge worker can choose to trade one high-cost, high-tax jurisdiction for another similarly costly locale because she prefers living in a resort destination. Still, others will relocate for lower taxes, a lower cost of living, or a different quality of life. West Virginia officials hope that their state can capitalize on both motivations, combining low taxes and a low cost of living with natural beauty and outdoor activities that may appeal to many workers ready to leave their metropolitan lifestyles behind.[x]
Whether West Virginia’s politicians can work out the details in the future for their income tax plans remains to be seen. However, the prospect of such competition on Maryland’s border serves as a reminder of the very competitive nature of our federal system. States that were once economic and demographic powerhouses, such as California and New York, have squandered their advantages to go into relative decline.
[v] Jorge Barro, Joseph Bishop-Henchman, and Russ Latino, “Better Jobs Mississippi: Tax Structure for Growth,” Empower Mississippi, https://www.empowerms. org/wp-content/uploads/2021/02/Better-Jobs-report-.pdf.
[vi] U.S. Bureau of Economic Research, Real Gross Domestic Product (SAGDP1).
[vii] Internal Revenue Service, “U.S. Population Migration Data,” 2017-2018, https://www.irs.gov/statistics/soi-tax-stats-migration-data.
[viii] Chris Edwards, “Migration to Low-Tax States Continues,” The Cato Institute, Jan. 9, 2020, https://www.cato.org/blog/migration-low-tax-states-continues.