New York Governor Andrew Cuomo (D) and the Democratic-run state legislature in Albany are moving forward with a new budget deal that will raise income taxes in what is already a relatively high tax state. Many are now concerned this cash grab will exacerbate the ongoing loss of businesses and people from a state that already had one of the nation’s highest population outflow rates. Meanwhile the inverse is about to occur in North Carolina, a popular destination for ex-New Yorkers. 

While New York is perennially one of the nation’s top losers when it comes to population, North Carolina has experienced some of the highest population inflow rates in the U.S. in recent years. North Carolina lawmakers are now poised to take the opposite approach from New York when it come to taxes in a way that will serve to make North Carolina an even more welcoming destination for those looking to flee New York’s high tax burden, onerous regulations, and high cost of living. 

While Governor Cuomo will soon enact a budget that increases New York’s top state income tax rate from 8.82% to 10.9%, North Carolina Senator Paul Newton (R) recently introduced legislation to cut North Carolina’s income tax from 5.25% to 4.99%. New York and North Carolina are also heading in contrasting directions when it comes to taxation of business. Both states are among the 16 nationally that impose a franchise tax on businesses based on their value. But Governor Cuomo’s new budget deal raises New York’s corporate franchise tax from 6.5% to 7.25%, whereas Senator Newton’s bill will reduce North Carolina’s franchise tax burden. 

In addition to making North Carolina’s tax code more regionally, nationally, and globally competitive, Senator Newton’s bill would offset and counteract the pain that is about to be inflicted on individuals, families, and employers by the federal tax hikes being pursued and likely to be enacted by President Joe Biden and the Democratic-run Congress. It’s not so much a question of whether President Biden will get to sign tax increases into law this year as it is what form they will take and how large they will be. 

While President Biden is hoping to enact a corporate tax hike this year that will reduce the job-creating capacity of American employers and make the U.S. a less attractive destination to headquarter a company, Senator Newton’s bill would reduce the tax burden for companies that do business in North Carolina by cutting their state franchise tax burden. For businesses operating in North Carolina, Senator Newton’s tax cut would partially offset the higher federal taxes that are set to be imposed on all companies doing business in the U.S. Businesses in New York, meanwhile, face the double whammy of both a higher state franchise tax burden and a greater federal corporate tax liability in 2022. 

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Small businesses would also benefit from enactment of the new tax plan pending in the North Carolina General Assembly. In addition to the relief that Senator Newton’s income tax cut would provide to households, it would also increase the job-creating capacity of North Carolina small businesses, most of whom file under the individual income tax system. According to IRS data for the most recent year available, 2018, more than 817,000 sole proprietors file under the individual income tax system in North Carolina, as do more than 262,000 partnership and S-corp owners. 

Likewise, New York’s impending personal income tax hike is marketed as a way to soak the rich, but will hit thousands of Empire State small businesses that file under the individual income tax system. Governor Cuomo’s new income tax hike, when combined with New York City’s local tax hike, will result in a higher cumulative top income tax rate in Gotham than in California, home to the nation’s highest state income tax rate of 13.3%. 

It’s not only high earners who already face a hefty tax burden in New York. In fact, the Empire State is home to the nation’s highest average state and local tax burden, with state and local government confiscating 14.1% of the average New Yorker’s paycheck. New York’s average tax take is well above the national average state and local tax burden of 10.3%. New York’s tax burden is even less competitive when put up against some of the most popular destinations for ex-New Yorkers, such as Tennessee (7%), Florida (8.8%), North Carolina (9.5%), and Texas (8%). 

New York was losing people and employers to states with more competitive tax codes and less hostile regulatory climates long before the pandemic. Between 2011 and 2018, New York experienced a net domestic outmigration of more than 963,000 people, who took $47 billion in income with them to their new state of residence. This exodus is poised to continue, nudged by the latest policy decisions coming out of Albany. 

According to IRS data, there was net outflow of 12,471 people from New York to North Carolina between 2017 and 2018, who took $534 million in annual income with them to the Tar Heel State. The latest tax hike out of New York, combined with the new tax cut introduced in North Carolina, is expected to help fuel the continuation of this trend.

Governor Cuomo used to express the belief that as an already high-tax, high cost-of-living jurisdiction, there was little to no room in New York for tax hikes that target businesses and the highest earning (and most mobile) households. “New York has no future as the tax capital of the nation,” Governor Cuomo said in 2011. Governor Cuomo’s calculus has clearly changed. Unfortunately for Cuomo and for the welfare of the state as a whole, many businesses and people who previous thought that they needed a physical footprint in New York have also changed their thinking. 

New York is poised to lose as many as two congressional seats in the upcoming post-census reapportionment. The hostile tax and regulatory climates established by Governor Cuomo and Albany politicians have contributed the Empire State’s population loss and thus its soon to be diminished congressional clout. Meanwhile, North Carolina, Texas, and Florida will see their influence in Congress strengthened, as those states will take the congressional seats being given up by New York, California, Illinois, and other states where lawmakers have enacted policies over the past decade that have driven away people and employers. 

With man firms, companies, and workers in the process of determining whether they need or even want to be in New York, many believe that the timing for the tax increases in the new state budget could hardly be worse. A group New York City business leaders warned as much in a joint letter sent to Governor Cuomo in March.

“This is simply about our people voting with their feet,” the letter stated. “The proposed tax increases will make it harder to get them to return.”

That letter was signed by CEOs who employ approximately 1.5 million New Yorkers, including Robin Hayes of JetBlue Airways JBLU , Sandeep Mathrani of WeWork, Howard Lutnick of Cantor Fitzgerald, Debbie Pearlman of Revlon, Stephen Schwarzman of Blackstone BX , Rob Speyer of Tishman Speyer, James Tisch of the Loews Corp L , Albert Bourla of Pfizer PFE , Jamie Dimon of JP Morgan Chase JPM , Jeff Blau of the Related Companies, Robert Bakish of ViacomCBS, and John Catsimatidis of the Red Apple Group. 

“A Manhattan Institute survey last summer found that 40% of residents were considering leaving New York,” writes City Journal editor Steve Malanga. “A majority said that they didn’t think the taxes they paid were worth the services they received. It’s unlikely that yet another tax increase will change those sentiments.”

One of the benefits of the federal system of government in the U.S. is that it allows for policy experimentation and demonstration as to which approaches work better than others. Yet as Governor Cuomo and New York legislators are demonstrating, not all will absorb the lessons that federalism bestows upon us.