Kelly Evans: Moving to Tennessee
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If you thought the states' battle for businesses and talent was bad before, just wait
I was at the lake over the weekend talking to another dad as we watched our kids running around together in the sand. "It's too bad we're only just meeting," he said. "Because we're moving next week." They're moving to Nashville. It turns out he did his job at a hedge fund quite well during Covid without being physically present with his team in Manhattan, so he's got the green light now to relocate permanently.
"No state income tax!" He grinned. Meanwhile, New Jersey, where he's been living, not only has its own state income tax, it's had an additional "millionaires" tax on and off for the past decade. And its property taxes are over $9,000, on average. And believe it or not, the situation in states like New Jersey could keep getting worse even while places like Tennessee keep booming.
Why? Because of pension liabilities. ALEC's 2020 report on the states was just released today. Tennessee has the lowest unfunded pension liabilities per capita in the country, at just $6,300 per head. New Jersey is the fifth-highest, at over $28,000 per resident. Think of it this way: states have to pay their pensions from somewhere. From business taxes, or personal income taxes, or property taxes, or random fees on everything. Or from riskier investing in the hopes of higher returns.
I see those two numbers and know there's no way Jersey and other heavily encumbered states (Connecticut, Illinois, even Ohio) can really become more competitive. Not only are they starting in the hole, but their best chance to fund existing liabilities is through rapid economic growth--the very growth they are losing to other, cheaper, more fiscally vibrant parts of the country. The pandemic's work-from-home revolution has just accelerated that.
And Tennessee has made other key moves as well. They switched from a pure pension plan for state employees to a hybrid system with 401(k)-like elements for new hires in 2014. They've had the lowest unfunded pension liabilities per capita in the country since 2016. (Wisconsin made similar moves, with similar results.) Tennessee's unfunded pension liabilities now total just 11% of state GDP. Meanwhile, Mississippi's liabilities amount to 61% of its GDP, and New Jersey and Connecticut are just under 40%.
Something else that could widen the gap: the "ESG" investing trend. ALEC estimates that California has foregone $3.6 billion in investment revenues for their pension fund (already underfunded to the tune of $22,000 per capita) by divesting from tobacco companies starting in 2001. Divesting from fossil fuels could forego billions more in the decades to come--plus has the double whammy of raising fuel costs for residents at the same time.
The stakes have never been higher for high-pension-debt states to retain their top talent. Even migrating to a hybrid pension system now, this late in the game, could help put residents' minds at ease about the potential for tax bills to climb yet higher. Capital might have been mobile before, but now, it's going into overdrive.
See you at 1 p.m!
Kelly