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A Winning Formula

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A Winning Formula

Low tax burdens and economic dynamism can help states attract new residents. February 2, 2022
Economy, finance, and budgets
Politics and law

America is experiencing a “great reordering,” in which individuals have increasing flexibility to choose where they live. One of the most salient factors driving domestic migration—and one that policymakers can most easily manage—is a state’s tax burden.

States with lower taxes tend to attract more migrants than they lose, while the opposite is true for states with high taxes. Indeed, of the ten states with the highest tax burdens, as calculated by the Tax Foundation, all but Rhode Island were net losers of migrants in 2019. While taxation alone is a strong indicator of domestic migration, its true power is revealed when analyzed in combination with the dynamism of a state’s economy. States with dynamic economies and relatively low taxes will attract more residents on net.

A state’s tax burden appears much more influential in enticing new residents than in compelling residents to pack their bags. In 2019, the ten states with the lowest tax burdens attracted nearly one-and-a-half times the number of domestic immigrants of high-tax states, despite having an aggregate population almost 16 percent smaller. For domestic emigration, the effect was reversed (albeit less pronounced), with high-tax states losing 2.2 per 100 residents, compared with 2.1 per 100 residents in low-tax states.

Most Americans have an innate bias to remaining in their current location—family, friends, community, jobs, and transaction costs tend to keep people where they are. Yet once the choice to leave is made, the unique characteristics of one’s potential destination will undoubtedly rise in importance, with tax burden a leading factor. In fact, the relationship between migration and tax burden is stronger than that between migration and cost of living—a much broader measure.

The weaker effect of cost of living is revealing. Even more than costs, it is economic dynamism combined with low taxes that matters most for migrants. (The Economic Innovation Group defines dynamism as “the rate and direction of change in an economy,” which “traditionally encompasses activities like the rate of new business formation, the frequency of labor market turnover, and the geographic mobility of the workforce.”) While low-cost states such as Arkansas, Kentucky, West Virginia, Mississippi, Louisiana, and Alabama tend to have moderate tax burdens, they are also among the poorest and least economically dynamic in the country. Their affordability is not enough to make them economically attractive. Unsurprisingly, their net migration is effectively zero. By contrast, states with high economic dynamism and low or moderate tax burdens—Georgia, Florida, Texas, North Dakota, Arizona, and Wyoming, for example—tend to attract and keep residents. In fact, not one state with a highly dynamic economy and either a low or moderate tax burden has negative net migration.

Conversely, only one state in America—California—has both a high tax burden and a highly dynamic economy. It attracts migrants but also hemorrhages residents at a much higher rate. California lost 654,000 residents in 2019, the most of any state. California is the only highly dynamic economy with a negative net domestic migration rate: the tenth-worst in the country, at -0.4 percent. Given its high taxes and high cost of living—and despite its many positives—California simply cannot stop people from leaving.

Remote work will amplify this dynamic. More Americans will be able to keep working for their California-based company while enjoying Texas tax rates, for example. Such a development will be particularly relevant for younger residents, new labor-market entrants, and those who have traditionally been understood as less mobile—including families and service professionals who cannot work remotely. If millennial and Gen Z office workers flee high-tax locations, not only restaurants and bars but also Uber drivers and entertainment industries may well follow.

Of course, flight from high-tax areas will have a knock-on effect on the public and private services and amenities those states offer, as the tax base and economy erode. On the other hand, growing areas will see a boom that will further entice newcomers. All this is to say that high-tax, high-cost states may face some serious challenges in the future. Economic dynamism alone will not be sufficient to maintain the status quo. Meantime, low-tax states, particularly those with highly dynamic economies, should take care to preserve their winning formula, even amid growing demands for public services. Tax hikes could kill their golden goose.

Photo by Alexi Rosenfeld/Getty Images

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