A new study from the Center for Budget and Policy Priorities (CBPP)* dispels conservatives’ myth that increases in state income taxes cause significant out-migration of high income households and lost tax revenue.
People are tied to their residences by jobs, family, social contacts, and the stress and hassle involved in relocating. As a result, interstate moves are rare. During the last decade, only about 1.7% of U.S. residents per year moved from one state to another and some of these moves were within metropolitan areas that straddle the borders between two or more states.
The CBPP report examines five states and identifies several factors that appear to be more important drivers of migration than taxes.
Likely the most important single economic factor driving the decision to migrate from one state to the next is housing prices. The CBPP report notes that:
A family might be able to cut its taxes by a few percentage points by moving from one state to another, but housing costs are far more variable. The difference between housing costs in two different states is often many times greater than the difference in taxes. So what might look like migration in search of lower taxes is really often migration for cheaper housing.
Other factors that are apt to influence the propensity to migrate are:
- Family structure. Married couples are more likely to migrate if it will enable both spouses to find work, although they are less likely to migrate once they have found it. In addition, families with children are less likely than others to migrate.
- Homeownership. The cost of selling a home and buying a new one is a powerful incentive for homeowners to stay put. (With the collapse of housing prices, many homeowners may be reluctant to relocate because they do not want to sell their home at the bottom of the market or—even worse—sell their homes for less than they paid for it.)
- Age. People from the age of 18 to 24 have the greatest propensity to migrate either for educational opportunities or to find employment. People of this age are often more mobile because they have yet to start a family.
- Employment status. Unemployed people are four times more likely to migrate from state to state than are other people.
Newly available data from multiple sources have enabled researchers to examine the impact of state income taxes on the migration of high income households. Most of the studies that have examined this issue in a “rigorous and thoughtful manner” have found little or no tax impact on migration.
For example, an examination of data from 1970 to 2000 found that “differences in average income tax rates did not affect interstate migration of high-income elderly households” (Conway and Rork, 2011). Another study “failed to find conclusive evidence that differences in state income taxes affect the location of the rich” (Slemrod and Bakija, 2004).
One of the most rigorous (and frequently cited) studies examined the impact of the 2004 New Jersey income tax increase on filers with incomes in excess of $500,000 (Young and Varner, 2011). As summarized in the CBPP report:
[Young and Varner] found that while the net out-migration rate of this income group accelerated after the tax increase went into effect, so did the net out-migration rate of filers with incomes between $200,000 and $500,000 [who were not affected by the tax increase], and by virtually the same amount. At most, the authors estimated, 70 filers earning more than $500,000 might have left New Jersey between 2004 and 2007 because of the tax increase, costing the state an estimated $16.4 million in tax revenue. The revenue gain from the tax increase over those years was an estimated $3.77 billion, meaning that out-migration — if there was any at all — reduced the estimated revenue gain by a mere 0.4 percent.
In short, the impact of the New Jersey income tax increase on out-migration was tiny to non-existent and did not have a significant effect on the amount of new revenue gained from the tax.
Finally, claims from anti-tax proponents on the impact of taxes on migration fail to take into account the positive impact that public investments—paid for with tax dollars—can have upon migration.
As noted in the CBPP report:
Moreover, low taxes are a double-edged sword when it comes to attracting mobile households. Studies show that such amenities as cultural facilities, recreational opportunities, and good public services are powerful attractions for potential migrants. Many of those services are financed with tax dollars. Therefore, while low taxes decrease the cost of living, they might also prevent states from preserving or improving valued public services, which would discourage potential migrants.
In addition, investment of tax dollars in education, workforce development, and infrastructure can encourage job growth that would not occur in the absence of this investment. As noted above, employment opportunity is a powerful migration incentive. Thus, the prudent use of tax dollars could actually stimulate in-migration to a state.
Income tax rates are only one of many factors that influence migration patterns—and a rather insignificant one at that. The CBPP report concludes that the “effects of tax increases on migration are, at most, small—so small that states that raise income taxes on the most affluent households can be assured of a substantial net gain in revenue.”
* “Tax Flight is a Myth: Higher State Taxes Bring More Revenue, Not More Migration,” Robert Tannenwald, Jon Shure, and Nicholas Johnson; August 4, 2011. Published by Center for Budget and Policy Priorities.