Americans Are Still Fleeing High-Tax States

I've never moved for tax reasons, but I have refused to consider some destinations (and turned down jobs) because I didn't want to pay ruinous local rates or live under the intrusive laws that seem to go hand-in-hand with grabby tax regimes. Unsurprisingly, I'm not the only one who takes the sticky fingers of government into consideration when deciding where to live and work; crunching data from government and private sources, the Tax Foundation says that taxes play a significant role in where people choose to live.

Americans On the Move

"Every year, millions of Americans pack up and move from one state to another, providing unique insights into what people value when deciding where to live, work, and raise a family," Andrey Yushkov and Katherine Loughead, senior policy analysts for the Tax Foundation, wrote last week. "The latest IRS and Census data show that people and businesses favor states with low and structurally sound tax systems, which can impact the state's economic growth and governmental coffers."

This may seem like a "duh" moment for many readers. All things being equal, who doesn't prefer to live in places where politicians are less prone than the competition to pick pockets and smother progress? And for normal people, the idea that high taxes are a turn-off is common sense.

But we're not talking about normal people; we're talking about government officials who use their long-suffering subjects like milking cows and prefer to do so without consequences. There's even a cottage industry of pundits—like Stanford sociologist Cristobal Young, author of The Myth of Millionaire Tax Flight—who tell politicians what they want to hear.

That politicians aren't as fooled as they pretend is obvious from the efforts of high-tax jurisdictions to penalize those who flee. In 2018, Illinois legislators passed a law to claw back tax breaks from "any recipient business that chooses to move all or part of its business operations and the jobs created by its business out-of-State."

"What we really could do is erect a border fence and then have gates where we tax people that left the state just because they didn't decide to stay here and do business," Rep. Jeanne Ives, a Republican who opposed the legislation, joked at the time. "I mean this bill is ridiculous."

Other grabby states challenge people's claims that they've moved, making them prove the change of residence. "If you're thinking of moving from your high-tax locale, chances are your state's income tax auditor won't let you leave without a fight," CNBC noted in 2019.

That's because people do consider taxes when they decide where to live and do business. They also consider the economic environment that taxes help to create in a jurisdiction.

Low Taxes Draw Innovators

"Our study shows that higher taxes negatively affect inventive activity and that inventors are geographically mobile in response to changes in tax incentives. As such, tax policy can exert a powerful effect on both the level and location of innovation," Ufuk Akcigit (University of Chicago), John Grigsby (Northwestern University), Tom Nicholas (Harvard Business School), and Stefanie Stantcheva (Harvard University) wrote last year in Microeconomic Insights of a study of inventors' response to tax rates that covered almost a century worth of data.

"Because the impact of taxes on innovation happens over time rather than all at once, our results suggest taxes can influence cumulative technological progress, which is a central feature of economic growth," they added.

Innovators have a documented history of establishing themselves and their businesses in low-tax environments. In doing so, they create thriving economies and opportunities that may well draw other people. That creates patterns that can be analyzed by the likes of Yushkov and Loughead of the Tax Foundation. They compared Census and IRS migration data to information derived from private sources such as U-Haul and United Van Lines which provide the trucks in which household goods are transported from state to state.

"The IRS data show that between 2020 and 2021, 26 states experienced a net gain in income tax filers from interstate migration—led by Florida (+128,228), Texas (+82,842), North Carolina (+40,828), Arizona (+32,636), and Tennessee (+30,292)—while 24 states and the District of Columbia experienced a net loss—led by California (-158,220), New York (-142,109), Illinois (-53,910), Massachusetts (-25,029), and Louisiana (-14,113)," write Yushkov and Loughead.

"Consistent with last year's version of this publication, it is clear from the 2020-2021 IRS migration data that there is a strong positive relationship between state tax competitiveness and net migration," they add. "Overall, states with lower taxes and sound tax structures experienced stronger inbound migration than states with higher taxes and more burdensome tax structures."

Four of the top 10 destination states don't tax wages or salaries at all. "Eight of the top 10 states either forgo individual income taxes on wage and salary income, have a flat income tax, or are moving to a flat income tax."

This doesn't mean that tax rates are the be-all and end-all when it comes to people's decision-making process as to what makes a desirable place to live and work. But it does mean that taxes are an important factor for many people no matter how inconvenient that fact may be for politicians and pro-tax pundits.

Low Taxes Generate Opportunity, Which Draws People

Importantly, even if many people aren't themselves perusing tax tables and considering the aggressiveness of state revenue agencies in their considerations, taxes definitely play a major role for innovators when they decide where to set up shop, as the Microeconomic Insights paper demonstrates. Those innovators establish companies and create jobs and prosperity that certainly do figure prominently in people's considerations when they're contemplating the next move.

"Sometimes taxpayers choose to move to a lower-tax state at least in part to reduce their own tax burden," comment Yushkov and Loughead. "But even those who do not consciously select for lower taxes may be doing so indirectly when they prioritize job opportunities and other factors related to the state's economic competitiveness."

The effects are cumulative over time, as creative, hard-working people, and the businesses they build, move from high-tax environments to low-tax jurisdictions. Grabby tax environments can pretty soon find themselves running out of cows to milk, and out of taxpayers to mug.