Cutting State Income Taxes No Way to Attract New Residents
May 8, 2014
Anti-tax advocates often claim that cutting individual income taxes, especially for those at the top of the income scale, is vital if states want to keep wealthy people at home and attract new residents. But a new report from the Center on Budget and Policy Priorities shows that personal income tax rates have little to no effect on where people live. Relatively few people relocate from state to state, and those that move do so primarily for job opportunities, family considerations, warmer climates and lower housing costs.
Besides being wholly unsupported by data, the erroneous notion that state income tax levels determine migration patterns threatens the public services that do matter to people whether re-locating or choosing to stay put; cutting Kentucky’s income taxes, for instance, would leave the state with less revenue to invest in the foundations of a strong economy—good schools, safe and attractive neighborhoods, affordable higher education and other public services.
Kentucky is already struggling to keep up its investments, and shifting away from the income tax would exacerbate the problem without providing the promised influx of wealthy, educated entrepreneurs (or any migrants, for that matter) to the state.
The report, “State Taxes Have a Negligible Impact on Americans’ Interstate Moves,” compiles data and reviews the literature over the last two decades on the relationship between state taxes and migration, which clearly indicate that state taxes have a negligible effect on the decisions people make about where to live. In particular, the report shows that:
- Interstate migration is small, getting smaller, and the overall population effects are minor: Of the few Americans who do move across state lines each year—about two people per 100—most cite jobs or family as the reason for relocation. And because the rate of in-migration and out-migration is generally on par for most states, the overall effect on any one state’s population is small. In fact, no state lost population overall between 2000 and 2009 due to out-migration.
- Just as people move to states without income taxes, so do they move in significant numbers to states with higher income taxes. For example, between 1993 and 2011, 250,000 people moved from income tax-free Texas to income-taxing California. Five states with income taxes attracted more migrants from Texas than they lost to Texas. And more than twice as many people moved to North Carolina than moved to no-tax Tennessee, despite the fact that North Carolina’s income tax rate was the highest of all Sunbelt states during that time.
- Low- to moderate-income households are more likely to move to no-income-tax states than are the wealthy, by roughly the same ratio as their share of the population. Between 2008 and 2012, 21 percent of people moving from California to Texas had incomes over $100,000, while 30 percent of people moving from Texas to California did. And between 2005 and 2011, there was net in-migration to California among the very wealthy. If taxes did play a big role in migration patterns, it would make sense for a larger share of wealthy households—for whom income tax rates are higher—to migrate to low- or no- tax states.
- Climate plays a big role in migration from “Snowbelt to Sunbelt states”—a long-standing trend in migration patterns—largely independent of taxes. No-income tax Florida does draw the biggest number of these warm-weather-seeking migrants, but the difference is largely attributable to the significant share of retirees moving there for the considerable infrastructure the state has to accommodate them. Retirees are not likely to be entrepreneurs who directly create new jobs, and the demand they do create for employment is significantly in the low-wage service sector.
Cutting income taxes has been offered as a panacea for what ails Kentucky, but research and common sense cast doubt on potential gains and confirm big losses. The more certain way to buttress Kentuckians’ quality of life and economic opportunities is to invest in education, health and infrastructure. Doing so costs money that the state’s income tax generates in a fair and sustainable way.