When it comes to attracting new residents to states, income tax matters. That’s the key takeaway from a recent report from the Institute for Reforming Government (IRG), a Wisconsin-based think tank whose research shows that tens of thousands of Wisconsinites are leaving the state in search of lower tax burdens.

What does that mean for Alabama, which ranked 20th in population growth last year, adding just under 25,000 new residents?

If Alabama wants to stay competitive with our neighbors and attract new citizens to the state, it means income tax rate cuts must be on the table.

Six of the top 12 states in terms of population percentage change from 2021 to 2022 are in the Southeast. Florida, Texas, and Tennessee are among the fastest-growing states in the nation. None of these levy any state individual income tax. Other fast-growing states like North Carolina and Georgia have passed significant rate cuts in the past two years and will be lower than Alabama within a decade.

Looking back at Wisconsin, the state has a top individual income tax rate of 7.65%, well above Alabama’s 5% top rate. According to the IRG report, “over 92,000 Wisconsin income tax filers left the state in 2021, with almost 60% moving to states with either a flat income tax or no income tax at all.”

That equates to about $4 billion in income leaving the state in one year, with more than $2.6 billion of it going to states with a lower income tax burden. It is a significant hit to the state’s economy, particularly small businesses. It also impacts state and local government’s bottom line, which IRG estimates lost over $400 million in tax revenues.

Wisconsin is not an outlier. New York had the largest population decrease between 2021 and 2022. It also had the third-highest individual income tax rate at 10.9%. California lost nearly 114,000 residents in 2022. The state has the highest income tax rates in the country, which will increase to 14.4% next year.

Alabama currently has the 27th highest top individual income tax rate nationally. It is far from the worst, but considering that two adjoining states have no income tax and several others in the Southeast are significantly lowering their rates, the state will struggle to remain competitive at the current 5% top rate.

Clearly, the Alabama Legislature needs to pursue policy reforms to lower the individual income tax burden felt by citizens. There were several missed opportunities to do so during the 2023 regular session. House Bill 116 by Rep. Danny Garrett (R-Trussville), would have eliminated the state’s 2% tax bracket, which individuals pay on the first $500 earned. Garrett’s House Bill 115 would have begun phasing down Alabama’s top income tax rate from 5% to 4.95%. The two bills would have saved Alabamians about $82 million per year.

Both bills passed the Alabama House of Representatives unanimously but failed to be debated in the Senate. And while lowering the top rate to 4.95% would have been a start, it is still higher than all but two Southeastern states. It likely would not have been enough to have a serious impact on population growth.

Bolder reforms are needed. In 2022, Mississippi enacted legislation to move to a 4% flat tax, saving taxpayers more than $500 million annually when fully implemented. Gov. Tate Reeves continues to push for a total elimination of the state income tax, though that effort has stalled for the time being. Georgia is moving towards a flat tax over the next decade.

Americans now have greater flexibility to work from home and be far away from a physical office space. With that flexibility comes an opportunity to live virtually anywhere they want. Income tax rates are not the only factor determining where someone decides to live, but there is clearly a link.

If Alabama wants to maximize the benefits of that shift, lowering the income tax burden is the place to start.

Justin Bogie serves as Fiscal and Budget Reporter for 1819 News. The views and opinions expressed here are those of the author and do not necessarily reflect the policy or position of 1819 News. To comment, please send an email with your name and contact information to: Commentary@1819News.com.

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