State Income Taxes and Interstate Migration

By Cohen, Roger; Lai, Andrew et al. | Business Economics, July 2014 | Go to article overview

State Income Taxes and Interstate Migration


Cohen, Roger, Lai, Andrew, Charles, Steindel, Business Economics


States consider a plethora of issues in determining their tax policies. Increases in income tax rates may be attractive because the additional burdens may be very light on the poorest; and, given the increased concentration of income over the past few decades, substantial revenue gains may be realized by concentrating rate increases at the top end. On the other hand, increasing income tax rates will, at least to some extent, soften incentives to work and save. Also, given the higher volatility of upper-end incomes, over-reliance on income tax collections from that group adds uncertainty and volatility to state revenues.

Another important issue in consideration of state income tax rate increases is their potential impact on tax flight. The economic reasoning behind tax flight is straightforward: rational taxpayers respond to incentives and penalties when making relocation decisions, and therefore they will tend to favor jurisdictions with lower tax burdens, all else equal. (1) Furthermore, loss of some taxpayers--particularly business owners--may trigger outmigration in groups not directly affected by an income tax rate increase.

Tax flight skeptics argue that cuts to income tax rates, defended on the grounds that they will be attractive to out-of-state businesses and individuals, will weaken a crucial source of state funding and could well necessitate increases in other taxes [Byrnes 20131. Indeed, Kansas, which in 2013 passed a gradual five-year state income tax cut, simultaneously enacted an increase in its sales tax rate to offset lost revenue [Kraske and Murdock 2013].

A key practical question is the actual scale of tax flight: to what extent are migration of individuals and--more important from a revenue standpoint--migration of income influenced by tax differentials across states? The tax flight issue is consequential not only to public officials, but also to businesses. If tax flight is substantial, a business in a state that is considering income tax increases may rightly fear the loss of customers. Furthermore, tax flight raises the possibility that the revenue gain from the hike would be inadequate for its original purpose, possibly necessitating some combination of reductions in government services or further tax increases.

The importance of the issue notwithstanding, the literature is fairly sparse in documenting the impact of state income taxes on migration. Numerous studies have suggested that migrants look at a number of state characteristics when deciding where to migrate--fac-tors including labor market conditions, housing affordability, climate, and state amenities [Carlino and Mills 1987; Borjas, Bronars, and Trejo 1992; Gabriel, Mattey, and Wascher 1995; Clark and Hunter 2008]. (2)

Much of the "tax flight" research has focused on specific subgroups of the population. Bakija and Sletnrod [2004] and Conway and Hountenville [2003] found evidence that wealthy elderly tend to move to states with no estate or inheritance taxes. Some studies suggest that professional athletes, who are often able to reap significant tax savings based on their team's location, may also be sensitive to tax differentials. In analyzing panel data from the European football market, Kleven, Landais, and Saez [2010] found that soccer players showed a strong tendency to migrate to European countries with more favorable tax regimes. Geisler and Moehrle [2013] found that baseball free agents would enjoy substantial "jock tax" (the aggregate state income tax paid by athletes to the jurisdictions they play in) savings if they played for teams in lower income tax states.

Other research has attempted to estimate the overall tax impact on migration patterns for the general population. A study by Coomes and Hoyt (20081 analyzed the effect of tax policy on moves to multistate Metropolitan Statistical Areas (MSAs). The authors, using Internal Revenue Service (IRS) data on migration of taxpayers and income, found some evidence that migrants would be more likely to move to the portion of an MSA located in a state that had lower income or sales tax rates than other parts of the MSA. …

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