Tax Season Trends: Blue States Move to Boost Competitiveness

This tax season, affordability and efforts to ease tax burdens are not just a priority for right-leaning lawmakers. Both sides of the aisle are increasingly concerned about competitiveness and looking to tax relief as a solution to jumpstart lagging state economies. 

Blue States Are Losing the Competition 

This year has been marked by the exodus of taxpayers and businesses from high-tax, high-regulation environments. Recent Internal Revenue Service data shows high-tax states – including Massachusetts – are losing billions in taxable income to lower-tax states.

It’s not just people moving out; businesses are leaving or investing in growth elsewhere too. Companies are moving away from hubs like New York, California, and Massachusetts and shifting investment to lower-tax, business-friendly states like Florida, Texas, North Carolina, and Tennessee.

These losses are taking a toll on economic growth. Data on gross domestic product (GDP), a key indicator of economic health, shows more competitive states for business including North Carolina, Florida, and New Hampshire are soaring past growth rates in states like Massachusetts.

Tax Cuts are a Bipartisan Solution

As affordability and cost of doing business are top of mind for residents and employers, lawmakers everywhere are looking for tools to boost their state’s competitiveness. As a result, tax relief proposals from both sides of the aisle are picking up steam.

In the last five years, a majority of states have lowered their individual income taxes in some fashion. On the other hand, just Massachusetts, Maryland, New York, Washington, and the District of Columbia have raised income taxes in that timeframe.

Democrat-controlled Colorado has already lowered its individual income tax twice since 2020, via ballot measures with significant majorities.

Another proposal aiming for the California ballot would require two-thirds of voters to enact ballot measures proposing new local taxes and cap certain real estate taxes. 

Minnesota governor Tim Walz has proposed cutting the state’s sales tax by three-quarters of a percentage point in the state’s most recent budget.

Nationally, high-profile Democrats including Sens. Cory Booker (D-NJ) and Chris Van Hollen (D-MD) have also proposed broad income-tax reductions. The “New Democrat Coalition,” made up of over 100 U.S. representatives, released a six-point platform to reduce taxes for individuals and businesses.

Lessons From Colorado

Taxes are an important piece of the puzzle when it comes to competitiveness, but they don’t make up the whole picture.  

Take Colorado for example. While the state has lowered some taxes, local business leaders are still urging lawmakers to make the state’s business climate more competitive. They say the state’s “excessive regulation” is still making it difficult to do business there, causing Colorado to lose investment to other states.

A recent letter from more than 200 business owners asks state lawmakers to review other structures that create barriers to starting and operating a business. This includes streamlining permitting and development processes to increase housing supply, assessing costly labor and workplace mandates, supporting emerging industries’ infrastructure needs including artificial intelligence, and revisiting burdensome environmental regulations.  

Conclusion

Competitiveness concerns are not unique to Massachusetts. Many states are worried about losing residents and business investment as residents flock to lower cost states with fewer regulatory barriers. 

Massachusetts has recently looked to address this problem. Last fall, Governor Maura Healey announced the formation of a new Competitiveness Council, which includes business owners and advocates across the state. The Council was set to strategize ways to boost business investment, address barriers for residents like cost of living, and make the state an attractive place to live and run a business. The state has also passed some tax reform, such as expanding certain tax credits, and proposed boosted state spending on business incentives. 

Still, Massachusetts must look for ways to reduce the tax burden, increase affordability, and encourage overall investment. The Commonwealth should be part of the national conversation, not an outlier that continues to drive its residents and business investment out of state.