Do people and businesses move to avoid high taxes? That’s certainly the claim of many politicians and policy advocates who contend that wealthy residents and successful businesses flee high tax states like California to seek out more hospitable business climates elsewhere. Given that many people seem to think these tax migration claims are a “fact,” it’s surprising that there is so little evidence to back this view. A few years ago, the Public Policy Institute of California did a very useful analysis, estimating that about 1.7% of California’s job loss between 1992 and 2006 was due to company relocations outside of the state. Instead, nearly all of the state’s job creation—and job loss—was home grown—due to the expansion or contraction of existing businesses. Now, we have another set of similar findings in a new study by the Center on Budget and Policy Priorities entitled: State “Income Migration” Claims are Deeply Flawed.
This research, by Michael Mazerov, examines the economic literature and finds fault with two basic claims made by many observers:
1) There is little evidence that people move in response to differences in interstate tax levels. Instead, most people move for more prosaic and hum-drum reasons. They took a new job, moved for family reasons, sought a nicer climate, or wanted more affordable housing.
2) There is little evidence that high-tax states are losing residents due to their less favorable business conditions. Moves from high-income tax to low-income tax states are not any higher than moves in the reverse order: from low-income tax to high-income tax states. Moreover, very few Americans actually move across state lines each year. About 1.5-2 % of Americans move each year, and that rate has been declining in recent years.
So, what is happening? Americans certainly do move, but they rarely move to avoid taxes. Instead, they move for a better climate, better schools, or better employment opportunities. Between 1993 and 2011, every state (except Michigan) that lost residents still saw an increase in local jobs and income. Thus, even when people do move, it doesn’t seem to have large-scale economic impacts.
These trends don’t mean we should ignore out-migration. If people are leaving a state in droves, it’s not a good thing—especially if out-migrants have high demand skills or high education levels. And, even if it’s true that people don’t move to reduce their tax burden, out-migration has hugely negative economic impacts. As talent leaves a state, the ability to attract or grow companies weakens, and the quality of schools, parks and other institutions declines. If you fear out-migration, act to stop it. But, don’t assume lower taxes will make people stay.