Little evidence seen of U.S. interstate “tax migration” threat

Millionaire golfer Phil Mickelson's recent musings on leaving California to avoid its high taxes seemed to support the idea, popular in some state capitals nowadays, that Americans will flee high-tax states for low-tax ones.

The threat of 'tax migration' is part of debates swirling in some states that are considering big changes to their tax codes. But studies show that interstate tax refugees, or potential ones such as Mickelson, are few and far between.

"It is very difficult to see a migration response when you look at the people affected by the taxes," said Cristobal Young, an assistant professor of sociology at Stanford University, who has studied tax increases in California and New Jersey.

Not even the super-rich exit in large numbers after taxes go up in their states, according to a growing body of research that shows relocation decisions involve many factors beyond taxes.

Some politicians are not so sure though. Tax-cut advocates in Kansas, Nebraska, Missouri, Oklahoma and Louisiana have voiced concern that their states are not competitive with nearby no-tax states, such as Texas and Florida, and that the imbalance chases away citizens and jobs.

A test is coming in Kansas City, which straddles two states: Kansas, which cut its top income tax rate to 4.9 percent from 6.45 percent on January 1, and Missouri, where the top rate remains 6 percent.

"It remains to be seen what will happen with Kansas, but people are watching," said Missouri state Senator Eric Schmitt, a Republican, who has sponsored one of several tax cut proposals now pending in that state house.

"People are rational economic actors and they are going to make decisions that are best for themselves."

TAXES AND MOVING VANS

Besides recent tax increases in California, Maryland also increased income taxes on high earners last year and the governors of Massachusetts and Minnesota have suggested increasing income taxes in part to finance sales tax cuts.

One of the strongest proponents of tax migration is Arthur Laffer, father of 'trickle down' economics and an adviser to tax cut proponents in North Carolina, Kansas and other states.

Between 2001 and 2010, according to Laffer's research, the nine states with the lowest tax burdens had faster population growth than the nine states with the highest tax burdens.

His studies of U.S. Internal Revenue Service tax returns and United Van Lines moving truck data showed more people moving to low-tax states from high-tax states than vice-versa.

Critics argue that many other factors, including strong economies, drive population growth. In two separate studies – one of a 2004 tax increase for New Jersey residents earning more than $500,000 per year, and one of a 2005 California tax increase on those with income greater than $1 million – Stanford's Cristobal Young and Charles Varner of Princeton University found neither measure substantially impacted the supply of millionaires in those states.

In California, the pair found the highest-income Californians were actually less likely to leave after the millionaire tax was enacted than they had been before. One reason could have been that most Californians earning more than $1 million did so for only a few peak years, the authors said. So the added bite of the tax increase was brief.

Separate studies of tax migration in Canada, Switzerland and areas surrounding large U.S. cities have also found taxes played little part in location choices, which involved factors such as commute times, community attachments and real estate costs.

Migration to warm-weather states including Texas and Florida goes back at least 50 years, noted University of Connecticut tax law expert Richard Pomp. Back then, some of the states people were leaving, including his own, had no income tax either.

On the whole, taxes do not have a material impact on where people choose to live, said Mark Zandi, chief economist for Moody's Analytics.

"People live in California for lots of different reasons," he said. "It's very difficult for them to find somewhere to go that's comparable to that state."

© Copyright 2013 Thomson Reuters. 

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