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Free Minds & Free Markets

State Migration Increasingly Driven by Taxes

Tax competition between states is alive and well.

Americans move from one state to another for a variety of reasons. They move to retire, to find jobs, to lower their housing costs, or to enjoy nicer weather. While experts disagree about whether tax competition between states plays a large or small role in these relocation decisions, a new study finds that taxes are actually a factor for migration and will increase in importance as a result of the 2017 tax reform.

That new study on Tax Reform and Interstate Migration is from Chris Edwards, a tax expert at the Cato Institute. Using 2016 data from the Internal Revenue Service, he finds that 578,269 people moved, on net, from the 25 highest-tax states to the 25 lowest-tax states. That's a loss of $33 billion in aggregate income for these vacated states. In that year, 24 of the 25 highest-tax states suffered from net out-migration. The only high-tax state that saw in-migration was Maine.

No matter how one views and dissects the data, Edwards shows that state tax levels and net migration flows are highly correlated. The relationship is even more pronounced with households headed by a person age 65 or older and households with income higher than $200,000. It might not come as a surprise that some of the states both seniors and high earners are leaving are Alaska, Connecticut, California, Illinois, Maryland, New Jersey, New York, North Dakota, Pennsylvania, and West Virginia. The top 12 destinations for these taxpayers are Arizona, Colorado, Florida, Idaho, Montana, North Carolina, Nevada, Oregon, South Carolina, Tennessee, Utah, and Washington.

As Edwards rightly explains, the recent tax reform will make these trends even more potent. By limiting to $10,000 the amount of state and local taxes, or SALT, that people can deduct from their federal tax bill, many in high-tax states will feel the bite of their taxes more than they did before. High-income earners will be highly affected by the change since they use the deduction the most and deducted larger sums of money before the reform. This will increase their overall out-migration from the high-tax states where they may currently reside for the benefit of living in lower-tax states.

Another Cato study from 2016 called Freedom in the 50 States finds a strong correlation between migration and economic (fiscal and regulatory) freedom after controlling for climate and other variables. In other words, people tend to move to economically freer states. This makes sense since economic freedom tends to be a fairly good indicator of prosperity, as economists Chris Doucouliagos and Mehmet Ali Ulubasoglu showed in their review of 45 studies that analyzed the economic freedom-growth relationship. They concluded, "regardless of the sample of countries, the measure of economic freedom and the level of aggregation, there is a solid finding of a direct positive association between economic freedom and economic growth." More economic growth usually means more jobs, which are definitely an important factor in migration.

This, then, raises the question of why so many people still live in the least-free states like New York and California. The fact is that when it comes to where people choose to live, intrinsic characteristics of a state weigh heavily in the decision. Among the factors that keep people in less-than-free places are jobs, family, friends, and local amenities. In other words, there's a certain stickiness to states that have nothing to do with how free these places are.

There are times, however, when that stickiness is significantly reduced—for example, when a taxpayer is younger, or looking for a job and hasn't settled anywhere, or about to retire. In those cases, economic freedom tends to matter a lot. This explains why Florida—which is not a perfect libertarian heaven but has no income tax—is a top destination for retirees.

Edwards' study shows that tax competition between states is alive and well. Now imagine how much more potent this competition would be if the biggest tax bill we have to pay each year weren't the federal tax bill. The uncontrolled growth of the federal government tax bite, whether through the income tax, the payroll tax or both, has taken too much juice out of the competition between states. The SALT reform is helping restore some of it, which means that high-tax states better start providing better benefits to taxpayers at lower costs if they don't want to pay an even higher out-immigration price.

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  • Conchfritters||

    ...as economists Chris Doucouliagos and Mehmet Ali Ulubasoglu showed in their review of 45 studies...

    Fuck those studies - - The Starks were always right - Winter is coming.

  • DiegoF||

    I am loving that ethnic cooperation though! Really gives you hope for the future of this world!

  • buybuydandavis||

    SALT tax deductibility is a big change.

    I was just hit by another change. I was doing my ordering of vitamins for the next 3 months, and iherb charged me tax. What? Since when?

    Looks like that Supreme Court case preventing states from charging internet sales tax is having its effect.

    I think this is huge. Internet money is based on internet sales. Amazon and other internet only companies had a 5-10% built in advantage against Walmart. That's going. If internet companies don't have the advantage, will internet ads and rankings on google search be as valuable? How about the information to target ads from twitter and facebook?

    I think the whole internet ecosystem was feeding off that that tax exemption. And now it's gone, and they have to compete with brick and mortar without a built in edge.

  • Magnitogorsk||

    Amazon has been collecting sales tax for years because they have physical presences in almost every state. Internet retailers have a monstrous edge over brick and mortar with or without a tax benefit.

  • perlchpr||

    They still have an edge. Walmart has to maintain physical shopping facilities, which Amazon does not, in addition to their warehousing and restocking operations. Likewise, since Walmart has to stock everything at every store, and Amazon just has to keep some in a warehouse somewhere, they have the advantage of having less "dead stock" of everything.

    Don't get me wrong, I agree that the sales tax thing was a significant advantage of online merchants, but it's certainly not the only factor that benefits online merchants.

  • Earth Skeptic||

    Avoiding sales tax on the internet is the least important factor to me. True choice, convenience, and some degree of pricing are much more important.

    As for Walmart, I will pay extra to avoid going there.

  • Untermensch||

    It might not come as a surprise that some of the states both seniors and high earners are leaving are Alaska

    Might not want to cite Alaska to make this point: It has the lowest tax burden of any state, although politicians there want to change that. The reasons people are leaving Alaska have to do with declining employment in the petroleum sector and older people who don't want to deal with the weather.

    But leading the list with Alaska seems sloppy.

  • Jerryskids||

    a new study finds that taxes are actually a factor for migration and will increase in importance as a result of the 2017 tax reform.

    A factor, not the sole factor. Suggesting they should hide Alaska in order to make a point they explicitly are not trying to make would be intellectual dishonesty, AKA "Fake News". They also point out that Maine is a high-tax state that is seeing a net in-migration.

  • Jerryskids||

    And I might add leading the list with Alaska isn't "sloppy", it's called "alphabetical order". The list isn't a ranking list of most worst to least worst, it's just a list of names.

  • DiegoF||

    I wonder if there was an episode of Hannah Montana that implied she was the bastard child of Joe.

  • DiegoF||

    After all that food talk below, now you are making me hungry for sole.

  • loveconstitution1789||

    The Lefties will infest this thread looking for souls.

  • Untermensch den 2||

    I get alphabetical order bit (it was rather obvious). But the point would be better made to say "Here are the high-tax states that are seeing net out migration" and "Here are some other states seeing net out migration for other reasons". But as it stands, if you don't know that Alaska has a low tax burden, the obvious interpretation here would be that Alaska is losing population because of high taxes, which isn't the case at all.

    You know, in an article about tax rates driving migration, with a list of states explicitly cited to make the point, one might reasonably expect the list to be included to make that point. This was citing Alaska in a way that made it sound like it was supporting a point that it doesn't support at all. It would be easy enough to have written in a way that didn't create that impression and that didn't rely on readers' outside knowledge (how many people not already versed in tax policy would really be expected to know Alaska has the lowest taxes in the Union?) to know that it is an exception in the list.

  • Untermensch den 2||

    And I didn't say "the sole factor". I also didn't suggest that they should "hide Alaska". And if they "explicitly are not trying to make" the point you say they aren't, then this article has no point at all. I am glad they pointed out that Maine is an exception. Maybe pointing out that Alaska is an exception the other way would be the honest thing to do here, because right now there is nothing in the article to tell you that Alaska is anything other than exemplar of the point you seem to think they aren't trying to make.

  • vek||

    That tripped me up in my head for a second too, since I understood Alaska to be a low tax state. It made me think maybe they'd gone stupid with raising taxes in the last few years. Glad to know that's not the case!

  • sarcasmic||

    Leading the list with Alaska seems like alphabetical order.

  • DiegoF||

    Alaska had been booming in population so intensely I'm actually rather shocked. Not so long ago the least populated state, now I think only the fourth.

  • loveconstitution1789||

    According to some on here, tax breaks for entire industries are crony capitalism.

    And then Reason does article about state migration based on state tax competition. Coincidence?

  • Jerryskids||

    Yeah, I noticed that, I also notice that some of the commentariat here don't think egg-free "mayonnaise" is real mayonnaise and then Reason goes and does an article about increased subsidies for soybean farmers. Quite a coincidence.

  • DiegoF||

    I have heard egg free mayo can be shockingly good. Kind of like the lowfat sour cream of nondairy spreads I guess. I can't stand mayo in the first place so I can't really judge the issue myself.

  • loveconstitution1789||

    Creme Fraiche?

  • DiegoF||

    I have no idea what the lowfat version of that would even be, conceptually. You might as well talk about lowfat butter.

  • JesseAz||

    Low-fat butter is that fake margairine crap, or Vaseline.

  • Old Mexican - Mostly Harmless||

    Re: lovecons... why bother?,

    --- According to some on here, tax breaks for entire industries are crony capitalism. ---

    For "entire industries" like solar and wind or movie making, for instance?

    Focused tax breaks are examples of crony capitalism. Fuck you, lower all taxes, is what we argue those of us you say are 'some'.

  • loveconstitution1789||

    MAGA!

  • Longtobefree||

    A few random facts;
    In addition to not having an income tax, Florida has warm to very hot weather (everyone gets arthritis sooner or later)
    Our particular weather disaster, hurricanes, gives days (Gulf) or weeks (Atlantic) of warning, compared to say tornadoes or earthquakes.
    You never, ever, have to shovel rain off the sidewalks.
    We are several years behind the curve of socialism compared to other states, but hurry down, because it's coming.

  • DiegoF||

    You're about to elect one governor, so hurry indeed.

  • WhatAboutBob||

    We are several years behind the curve of socialism compared to other states, but hurry down, because it's coming.

    Don't worry, the open borders people have been working overtime to make sure socialism comes to every state.

  • loveconstitution1789||

    +1

  • DiegoF||

    Hey, what happened to that optimism for the future of liberty in this country?

  • loveconstitution1789||

    MAFA!

  • JesseAz||

    Socialism is such a positive benefit they export the excess population created by the wealth.

  • Gilbert Martin||

    Hurricanes can - and do - spin off tornadoes - in Florida as well as other places.

    Florida also has sinkholes that can swallow your house overnight.

    Not that I'm particularly dissing Florida. Their lack of income taxes is definitely a big plus.

    Every place has trade offs however.

  • posmoo||

    no stay in california. they'll just vote for the same bullshit here.

  • DiegoF||

    Yes. There are so many Californians, Northeastern bougies, and Latinos that (even if the last of these groups is the least prog) they can swamp most states, turn them purple, and change their political and social culture from the ground up. Virginia is essentially a blue state at the Presidential level now. North Carolina is purple. Georgia is purple. Florida is moving back blueward again, about to elect a far-left governor. Texas is purpling. Arizona is purpling. The reddening (and shrinking) Midwest will be no counterweight.

  • loveconstitution1789||

    Georgia is NOT purple.

    Atlanta proper is blue and that's changing as black folks stop voting Democrat.

  • DiegoF||

    Why is a far left Black Lives Matter activist leading in the polls to become your next governor? And what evidence is there of blacks voting for Republicans (apart from the small Trump uptick and other small ups and downs over time), as the eternally optimistic have been predicting would be happening any time now for the past half century, since their near-total abandonment of the party was completed in the 1970s?

  • loveconstitution1789||

    The media lies, like the media always does.

    Kemp will be the next Georgia Governor. It wont even be close.

    You can believe what you want, but I have black neighbors with Republican campaign signs in their yards.

  • NoVaNick||

    Virginia is becoming a solidly blue state, at the state and national level. The state senate and assembly will likely flip next year from GOP to DEM control, then the taxes will really start to go up, so all the transplants from NY, NJ,and MA here will really feel at home.

  • vek||

    All true unfortunately. As a native Californian I would like to point out that it wasn't long time Californians that ruined California either! It was progs from the northeast that moved there, ruined it, then they/their progtard kids have started moving out ruining everywhere else.

    My family moved to Washington state almost 20 years ago, and it was a pretty sane and centrist state back then... Now it's basically done for.

    Mathematically it's really Hispanics that were the straw that broke the camels back nationally though, anybody that can't accept that is a fool and doesn't know how to read numbers. Without the Reagan amnesty, and all the anchor babies from current illegals, several states would be red that are purple and purple that are now solidly blue. 15% of the population that votes shitty will tend to tip the scales a bit... IF they can ever be converted, it will only be after the flood of new ones stops.

    I for one am likely moving to Idaho. By the time Idaho falls, the rest of the country will already be long gone. It'll be one of the last places to go to shit. Hopefully we'll split the country into 2 (or more) before then and save some vestiges of the original intent of the USA... But if not I can ride it out there til the wheels fall off!

  • DiegoF||

    Whenever I read the "Veronique de Rugy" byline I always liked to imagine a smoking hot West African woman. Today I finally decided to google for some reason.

  • SardonicOne||

    Just for a moment, I read that as "Increasingly Driven by Texas," which might be equally true.

  • Enjoy Every Sandwich||

    I keep expecting California and Illinois to build walls, plant minefields, etc. to stop people from escaping.

  • Earth Skeptic||

    That, and exit taxes.

  • Ron||

    California tried to tax ex pats but the court rejected it, thankfully

  • Hank Phillips||

    Welcome to the Laffer curve! President Calvin Coolidge bragged that lowering Federal taxes increased actual revenue during his administration. The sad part is that looter politicians elsewhere imitate Dem and GOP tax hikes and deficit spending occurring in "the Land of the Free." But waves of refugees flee those benighted Junta-ridden satrapies and flee to Texas every time one of those economies collapses under the weight of those taxes. If Republicans cared about taxes and spending (instead of bullying girls and exorcising Satanic plant leaves), you could count on two fingers the States that HAVE an income tax!

  • TommyInIdaho||

    "Among the factors that keep people in less-than-free places are jobs, family, friends, and local amenities. In other words, there's a certain stickiness to states that have nothing to do with how free these places are." Have you seen what passes for a bagel in Idaho? I love it here and wouldn't move back but, Oi!

  • vek||

    Yeah, it's a shame. As a native Californian, who had family there going back to the 1800s... We have a friggin' city named after my family even! So lots of reason to stay... California is heaven on earth in many ways... But it's been completely ruined. Too many people crammed in, and the laws are all insane. It's not livable there anymore. It sucks.

    If my dad hadn't had the wherewithal to throw in the towel on California nearly 20 years ago (when I was still a kid) and move, who knows if I might have just put up with it. Lots of people do. Stockholm Syndrome keeps a lot of people from realizing how awful things are there. LOL It was actually an extended trip to another state that made it sink in for my dad just how awful it is.

    Even being as ideological as I am now, the thought sometimes crosses my mind of how nice it would be to live in the land of eternal sunshine again where I grew up in northern California... But then my brain kicks back in and I realize how pissed off and miserable I would be all the time because of the insanity there.

    Unfortunately we moved to Washington, which only bought us about 15 years before it started going to shit. I'll probably be joining you in Idaho soon though! So there's that! I'm sure we can get some decent bagels going on at some point!

  • SimonP||

    What an idiotic take. Commenters don't catch the gap.

    So, look: Of course it makes sense to migrate to states with low tax rates, when those same states make up what they don't charge with federal tax revenue. That's the missing piece here. Who wouldn't take that deal? Move to a low tax state and make the richies back in blue states pay for your expenses through federal redistribution?

    This isn't a story about tax competition. This is a story of what happens when you subsidize patterns of migration and development through a broad redistribution of tax revenue. Equalize federal dollars in for federal dollars out, and then we might be able to observe whether someone living in a high-tax state thinks moving to a low-tax state is worth the massive loss in QoL they're signing up for.

  • vek||

    LOL

    Such an idiot. Yes, there are a few low tax states that are net recipients. Genuinely crappy/poor states like Mississippi for instance. However many aren't, like Texas. I believe much of the midwest as well.

    And what of that lovely federal subsidy to high tax states in the form of allowing them to deduct those state taxes on their federal returns? That was artificially lowering taxes for people in states where their state decides to rail them on taxes, which of course has to be made up by other taxpayers in other states with lower taxes. Thankfully that free ride is gone, and people will have to bear the burden of the real tax levels where they choose to live.

    The simple truth is that low tax states tend to just not spend as much money per capita on stuff. Mostly it tends to be them not doing as many pointless things with taxpayer money, or not having as generous of state based welfare programs.

  • vek||

    I live in Seattle right now. They have spent hundreds of millions of dollars on completely useless stuff. Everything would be humming just fine if they had not done ANY of the projects... But they taxed the money, and spent it on separate bike lanes with fancy dividers that few use, adding speed bumps on random roads for no reason at all that have never had them before. I mean THOUSANDS of them all over the city. I suspect it's just to piss people off and make them not want to drive somehow, since they're not even on lanes intended to be traveled by bikes or close to schools. Making random traffic revisions that actually make the flow of traffic worse. They replaced several hundreds bus stops around the city, that didn't even need repair let alone replacement, with ones that provide INFERIOR coverage from the elements. I could go on for days. None of it needed to be done. Mind you they don't even bother to fix half the pot holes on major roads, but they can do all this nonsense.

    Low tax states don't do dumb shit like that, so their citizens can keep that money and spend it themselves. Pointless projects account for most of the gap, not the feds subsidizing them.

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