As part of his new tax plan, the president has proposed ending the “step-up” in tax basis for inherited assets, and, furthermore, requiring the capital gains tax to be paid at death rather than when an heir later sells...
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- The Facts on Interstate Migration: Part Four
The Facts on Interstate Migration: Part Four
This is day 4 of our week-long series discussing taxes and migration, and responding to the Center on Budget and Policy Priorities’ Michael Mazerov’s new paper on the topic. Read part 1 here, part 2 here, and part 3 here.
Economic theory suggests that people with the most to lose from taxes may be the most likely to move. This has led to theories of how taxation relates to migration fixating on high-earners. In his paper, Mazerov critiques this view thoroughly, and points to data suggesting that migrants actually, on average, may be more on the low- and middle-income side than rich. This, he suggests, calls into question the relationship between taxes and migration. High-profile cases of tax-motivated migration like Tiger Woods and Phil Mickelson aside, insofar as it goes, Mazerov has a point in critiquing the simplistic argument that high-earners are running from state-to-state in pursuit of slightly lower taxes.
But that’s an overly simplistic model to begin with. While high earners may have the most to lose from higher income taxes, they are also, by definition, high earners, meaning they probably have a good job near where they live. The higher your income, the less likely there will be a job opening in another state which could boost your income. At the extreme, the richest person in the nation will never have an employment-based motivation to move, especially since Washington State, where Bill Gates lives, has no income tax.
If people move in order to improve their incomes, migration should be concentrated around income levels and educational groups where upward mobility through migration is readily possible on a large scale, and tax-motivated moves would, among that group, affect people deciding between jobs roughly in the same pay-range. For example, a person deciding whether to work on an oil rig in Texas, North Dakota, or Pennsylvania might be highly influenced by tax rates.
In other words, income-motivated migration won’t tend to concentrate among “higher earners” per se, but among the workers in every income band with the most potential for individual advancement. That is, the most entrepreneurial and ambitious workers. People don’t primarily migrate after becoming high earners, they migrate as a means to become high earners (except in the case of retirement migration which, as Mazerov correctly notes, is a somewhat different phenomenon).
This has been true for as long as the United States has existed. Pioneers didn’t go west because they had profitable farms in Virginia. Poor Virginians settled my home state of Kentucky, and became more prosperous (not least because the frontier had few or no taxes). Poor Midwesterners settled Colorado, Nebraska, Kansas, and other states, and became more prosperous (again, few or no taxes). Poor Californians move to Texas and become more prosperous, in no small part because taxes (along with numerous other factors) help to support economic growth.
When we combine this theory of upwardly-mobile migration with my earlier explanation that lower taxes affect migration through economic growth and employee recruitment, the outcome is compelling. Taxes may not always determine the quantity of migration, but they can impact the quality of migration. Entrepreneurs may be attracted to fast-growing markets with low taxes and better employee recruitment potential, especially if those states also have nice climates, low cost of living, and skilled labor. Likewise, ambitious people looking to advance themselves may be particularly likely to be driven away from high-tax states.
Mazerov is factually correct in noting that migrants aren’t necessarily rich people fleeing taxes. Migrants are often low- and middle-income people seeking a better quality of life and, especially, a better job. They’re people who will uproot themselves and their families from their place of birth and move, pursuing a better life, which often but not always means a place with lower taxes, because good tax policy is a key component of economic prosperity.
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