Tax Foundation Forum: Making Sense of Profit Shifting has reached its midpoint. In this halftime report, we provide a synopsis of the first nine of the 18 interviews in the series. This two-part review summarizes the key...
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- The Facts on Interstate Migration: Part Three
The Facts on Interstate Migration: Part Three
This is day 3 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 and part 2 here.
In his report, Mazerov accurately notes that jobs, climate, cost of living, and family are generally the biggest reasons for migration. But from there, his report makes a big leap, suggesting that this list implies taxes aren’t a significant part of the equation. We think this misses the point. It’s true those factors all matter, but taxes also matter, and, in fact, some of those variables themselves are impacted by taxes. One example I’ll focus on especially for this post is jobs, which are probably the most economically significant motivation for migration.
Millions of Americans have moved across state lines for a job at some point in their life. No one disputes that employment opportunities affect migration. We also all know that moving is costly: both in monetary terms to rent a moving truck and secure new housing, but also because it’s an enormous hassle to pick up your family’s life and move it to another state. The only reason someone would do this for a job is, we can assume, if that job either pays more or is simply a much more pleasant job. We can set aside the “more pleasant job” idea because that’s extremely hard to quantify, and focus on the higher pay issue.
If lower taxes encourage economic growth (and, broadly speaking, they do), it is likely that lower taxes would indirectly help boost employment. At least some of those jobs probably offer higher wages than what “potential migrants” earn elsewhere. When lots of new jobs are created in a state, probably some of those jobs will be filled by out-of-staters. So, even if lower taxes don’t create a sudden, massive wave of migration (which we do not suggest they do), the slow and steady process by which better tax policies support stronger economic growth will likely promote higher job growth and, in turn, more inward migration.
Furthermore, lower income taxes create higher after-tax wages, meaning companies can recruit workers more easily. Consider, for example, if you are a firm with operations in California and Nevada, and you are looking to expand your operations. You will need to hire several dozen workers who have skills that are somewhat rare; in other words, you’re competing to hire them. You could offer them $75,000 each in California, but their after-tax wage will be reduced by about $23,000 given current Federal and California income taxes. That means you’re actually offering those employees a $52,000 salary. But if you offered to hire them in Nevada, which has no income tax, the Federal income tax burden would be around $16,000. If you offered the same salary in Nevada as in California, the after-tax salary would be about $7,000 higher, which makes recruiting employees easier.
Other things like climate, regional culture, family, public services available, local communities, and housing costs also obviously matter, especially in deciding between specific locales within a state. Some of those factors are impacted by taxes while others aren’t, but the point is that even migration that isn’t directly created by taxes can still be indirectly affected by taxes.
So why do people move? We agree with Mazerov that there are many reasons for migration, perhaps foremost among them being employment opportunities. But employment opportunities themselves are partly conditioned on taxes, both because better tax codes encourage economic growth, and because tax policy affects employee recruitment for firms.
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