Changing Places, Changing Taxes: Exploiting Tax Discontinuities
Abstract
President Trump’s decision to move his official state of residence from
high-tax New York to no (income)-tax Florida has brought public
attention to an issue that has long troubled scholars, designers and
administrators of income tax systems: how the interaction of tax rules
deferring the taxation of income and tax rules based on residency
allows taxpayers to reduce and even avoid taxation of their deferred
income. These discontinuities in tax treatment may lead to excessive
migration, as well as reductions in state income tax revenues and
distortions in the design of state taxing mechanisms. This Article
explains what states would have to do to eliminate these avoidance
opportunities. However, it also points out that many of these policy
changes would create other tax discontinuities. Ultimately, it leaves
open the question whether making any of these changes would lead
to fewer financial and behavioral distortions.
high-tax New York to no (income)-tax Florida has brought public
attention to an issue that has long troubled scholars, designers and
administrators of income tax systems: how the interaction of tax rules
deferring the taxation of income and tax rules based on residency
allows taxpayers to reduce and even avoid taxation of their deferred
income. These discontinuities in tax treatment may lead to excessive
migration, as well as reductions in state income tax revenues and
distortions in the design of state taxing mechanisms. This Article
explains what states would have to do to eliminate these avoidance
opportunities. However, it also points out that many of these policy
changes would create other tax discontinuities. Ultimately, it leaves
open the question whether making any of these changes would lead
to fewer financial and behavioral distortions.