A recent study from the left-wing Center on Budget and Policy Priorities (CBPP) concludes, almost laughably, that taxes do not motivate people to leave high-tax states. The study’s authors argue that weather may have more of an effect on migration patterns than tax rates.
If that were true, wouldn’t people be moving to California and Hawaii in droves? Census data shows that this simply isn’t happening. Over the last 20 years, 3.6 million more Americans have moved out of California than have moved in, and 130,000 more Americans have moved out of Hawaii than have moved into the state. In striking contrast, Florida gained 2.3 million net residents during that same period.
The authors of the CBPP study point to the fact that Florida lost population in 2008 and 2009. This view ignores the big picture. Migration to Florida slowed when the real estate bubble burst, and it has since recovered. Moreover, Florida enjoyed a strong recovery in 2010, with a net gain of 55,000 domestic migrants, according to the latest data from the U.S. Census Bureau.
What makes Florida different from California and Hawaii? It has a much better tax climate. The argument that weather matters more than taxes falls flat on its face when you consider Alaska (a state that doesn’t have an income tax) suffered only half the population loss Hawaii (the state with the highest personal income tax) did over the past decade.
If weather matters more than taxes, then why is Alaska performing so well compared to California and Hawaii? Alaska may have the worst climate in the country and California and Hawaii arguably have the best, but Alaska has out-performed both states on nearly every measure, according to Rich States, Poor States: ALEC-Laffer Economic Competitiveness Index, a report from the American Legislative Exchange Council.
Census data consistently shows that people choose where to live, engage in commerce and invest based on economic competitiveness. High taxes drive many people and businesses to move to lower-tax states, and those people take their tax revenues with them. State tax policies play a significant role in determining which states prosper and which states fall behind in terms of economic performance.
Over the last decade, on net, more than 4.2 million individuals have moved out of the 10 states with the highest state and local tax burdens (measured as a percentage of personal income). Conversely, during the same period, more than 2.8 million Americans migrated to the 10 states with the lowest tax burdens. Put differently, every day on average — weekends and holidays included — 1,265 individuals left the high-tax states, nearly one a minute.
If taxes didn’t matter, then why would this be?
Population isn’t the only thing repelled by high taxes — income, investment and consumption are as well. When people escape from a state, they take their tax revenues with them. They take their businesses and jobs, too.
The authors of the CBPP study claim that there is no proof wealthy people relocate in response to higher tax bills. However, logic, numerous academic studies and abundant anecdotal evidence say otherwise. For instance, when Maryland enacted a special income tax on millionaires in 2008, it saw a 33 percent decline in tax returns from millionaire households. The authors of the CBPP study attempt to dismiss this exodus as a simple result of the recession, but that argument doesn’t hold water. According to a Bank of America-Merrill Lynch study of federal tax return data on people who migrated from one state to another, Maryland lost $1 billion of its net tax base in 2008 because of out-migration.
The folks at CBPP and other left-wing tax groups generally attempt to argue that high taxes, especially on the ever-changing category of people known as “the rich,” are necessary to promote fairness and collect revenue. However, these dedicated class warriors often forget a very basic fact: Many high-income earners are actually small businesses that pay taxes through the individual side of the tax code, so millionaire taxes are often paid by small business owners and operators, making these misguided policies job-killers, plain and simple.
State elected officials obviously have little control over their states’ 10-day forecasts, but they do control their states’ tax climates. We know tax policy is not the only reason people are motivated to live, invest or grow a business in a state, but it plays a significant role. State lawmakers should keep this in mind as they shape public policy.
Jonathan Williams serves as Tax and Fiscal Policy Task Force Director at the American Legislative Exchange Council, as well as Director of the Center for State Fiscal Reform. Williams is a co-author of Rich States, Poor States. Christine Harbin is the Research Manager at the Center for State Fiscal Reform at the American Legislative Exchange Council.
