How much impact do tax policies have?

The Tax Foundation has ranked Montana as Number Two among states to gain population due to Interstate Migration. As a percentage of population Montana gained 1.14 percent in population from 2019-2020 in population based upon an analysis of address changes from the IRS.  Idaho was Number 1 with 2. 05 percent. Arizona was Number 3 with 1.10 percent.

In total 28 states gained in population including Florida, Texas, North Carolina, and South Carolina—while 22 states and the District of Columbia experienced a net loss—led by New York, California, Illinois, Massachusetts, and New Jersey. Washington DC was actually the “state” to have had the greatest out migration with a loss of -2.17 percent, followed by New York with -1. 28 percent. North Dakota was 47th with a loss of – 0.72 percent in population, followed by California with a loss of -0.67 percent.

Reports the Tax Foundation: “For many years, policymakers, journalists, and taxpayers have debated the role state tax policy plays in individuals’ and businesses’ location decisions. Annual data about who is moving—and where—provide clues about the factors contributing to these moves.”

The Tax Foundation explained that these data, capture many of the interstate moves made early in the pandemic—between mid-March and mid-July 2020—but do not necessarily capture the bulk of pandemic-related moves, many of which occurred later in 2020 and even into 2021. It is more accurate however, than the more timely reports provided by moving companies. The IRS data are by default more comprehensive and provide important insights into the movement of adjusted gross income (AGI) among states.

When all individuals associated with each tax return are accounted for, including spouses and dependents, only one state, Wisconsin, saw a loss in tax returns attributable to interstate migration but a gain in individuals associated with the returns of those who moved in.

“Many factors influence an individual’s or family’s decision to move from one state to another….Cost-of-living considerations, including tax differentials, may not be the primary reason for an interstate move, but they are often one of several factors people consider when deciding whether—and where—to move.”

With this in mind, one observation from the 2019-2020 IRS migration data is that a strong positive relationship exists between state tax competitiveness and inbound migration. Overall, states with lower taxes and sound tax structures experienced stronger inbound migration than states with higher taxes and more burdensome structures.

Of the 10 states that experienced the largest gains in income taxpayers, five do not levy individual income taxes on wage or salary income at all, and two others had top marginal individual income tax rates that were below the national median at the time. Recently, those states have grown even more competitive. Nine 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.

Additionally, among the 28 states that experienced net inbound migration of income tax filers, only nine had a top marginal individual income tax rate above the national median. Meanwhile, among the 22 states (and the District of Columbia) that experienced net outbound migration of income tax filers, 15 states and D.C. had top marginal rates above the median. In the aggregate, states with a top marginal rate at or below the 2019 median of 5.4 percent gained 225,000 net new residents from the states with rates above the median.

A robust positive relationship also exists between states with below-average state and local tax collections per capita and those experiencing strong inbound migration. Of the 28 states that saw a net gain in income tax filers due to interstate migration, 22 had below-average state and local tax collections per capita in fiscal year 2020, while half of the states that experienced net outbound migration had above-average collections per capita.

Furthermore, a strong positive relationship exists between states with well-structured tax codes and those that experience net inbound migration. Among the 25 best ranking states on the 2020 State Business Tax Climate Index, which had a snapshot date of July 1, 2019, 20 states experienced net inbound migration between 2019 and 2020. Meanwhile, among the 25 worst ranking states on the Index, 17 experienced a net loss of taxpayers to interstate migration.

The Tax Foundation advises, “The reason policymakers should care about their state’s interstate migration patterns is the effect of interstate migration on tax revenue, economic output, and economic growth over time. Between 2019 and 2020, most states that experienced a net loss in income tax filers attributable to interstate migration also experienced a net loss in income associated with interstate migration, while most states that gained taxpayers also experienced corresponding gains in AGI.

Hawaii was the only state to lose residents on net yet experience a net gain in AGI, with new residents bringing in an average of $75,000 in AGI per return while departing residents had an average of $64,000 per return. Meanwhile, only three states—Indiana, Kentucky, and Missouri—saw a net gain in income tax filers but a net loss in AGI, with new residents earning less on average than the people who moved out.

Some of this is due to cost-of-living adjustments that tend to occur when individuals leave employment in one state for employment in another. For example, even if their job duties are substantially similar, a registered nurse employed in a high-cost-of-living state is likely to have a higher salary than one employed in a lower-cost-of-living state due to cost-of-living considerations that affect market rate earnings in different parts of the country.

There is evidence, however, that in states like Hawaii, the loss of relatively lower-income residents is somewhat attributable to high taxes and high costs of living causing lower- and middle-income residents to seek more affordable destinations elsewhere. Notably, four of the top five states Hawaii residents moved to—Washington, Texas, Nevada, and Florida—forgo individual income taxes on wage income.

Likewise, some of the gain of relatively lower-income residents in Indiana, Kentucky, and Missouri is likely due to the relatively low cost of living in those states compared to other locations. Crucially for economic growth, however, a low tax environment also encourages investment and entrepreneurial decision-making and attracts highly mobile higher earners as well.