Domestic Migration and Tax Policy
New York’s higher-income residents are fleeing the state, and they are taking their tax dollars with them. The New York Post reports that this is because of the state’s high cost of living and high taxes:
It all adds up to staggering loss in taxable income. During 2006-2007, the “migration flow” out of New York to other states amounted to a loss of $4.3 billion.
Not coincidentally, states that have lower tax burdens experience positive domestic migration. According to information from the Tax Foundation, New York has one of the highest marginal tax rates on personal income in the nation. In New York, the top marginal tax rate in 2009 is 8.97 percent. In Florida and in Tennessee, it’s 0.00 percent. In Missouri, this rate is 6.00 percent.
The Show-Me Institute has extensively explored the relationship between tax policies and domestic migration. In an op-ed, “Tennessee vs. Missouri: Taxes May Tip the Odds,” the institute’s executive vice president Dr. Joe Haslag explained how different tax structures contribute to domestic migration:
Economic theory indicates that the difference in income tax rates — that is, the property rights enforced on people’s labor, and the payment for that factor of production — can help to account for the differences in growth rates.
The basic idea is elementary economics. Consider two people with identical characteristics, one in Missouri, the other in Tennessee. Suppose those two people were given identical work opportunities, so that they had access to the same machines and plant surroundings. For one hour of work, each produced the same amount, and was paid $20. Excluding federal taxes, the person in Missouri would take home $18.80 while the person in Tennessee would take home $20. (If the person worked in Saint Louis or Kansas City, take-home pay would only be $18.60. We will save that discussion for another time.) The person in Tennessee will supply more labor because he realizes a higher return for his effort.
Related to this subject, Jenifer Zeigler Roland and Dave Roland recently published a case study that explores how different tax policies may have played a significant role in Tennessee outgrowing Missouri. They provide another explanation:
A lower overall tax burden is attractive to prospective businesses and residents, because it leaves more money available for consumers to spend on goods and services.