R.T. Young, Ph.D. Business Economics
Are individuals moving from higher tax states to lower tax states?
The hotly-debated issue has two components.
First, how big is the movement of individuals between states? Is the shift something worth worrying about?
Second, could taxes be a possible explanation for the movement of individuals from one state to another? In particular, is income tax a major culprit?
Here’s what the Internal Revenue Service (IRS) data looks like on these two questions. (As a note for the migration data, the data are essentially a matching of tax returns across time – for instance, an individual files in, say, Wyoming in 2008 and then files in New York in 2009.)
First, the following animated GIF shows the shift of individuals by county since 1997 across the United States. The color represents whether a given county was a net gainer or loser of migration income, with the darker the red representing a bigger net loser of migration income and the darker the green a bigger gainer in net migration income.
Besides the shift from the West Coast and northeastern portions of the United States to the Mountain West and South, it’s a little difficult to tell exactly where the geographic losers are. Here are the animated GIFs broken down by a more zoomed geography.
The western United States is below. From this, it’s pretty clear individuals have been consistently shifting away from southern California. In fact, for most of the years, the vast majority of the counties in the Golden State have experienced a net decrease in income migration. Perhaps unsurprisingly, a good deal of the shift from southern California has gone to neighboring counties in neighboring states.
The next GIF is for the middle portion of the United States.
One clear observation is the shift away from a good deal of the counties in middle America, perhaps as part of the urbanization of the population. In addition to the hollowing out of middle America, one can clearly see the strength and appeal of Texas and the weakness of the Great Lakes areas.
Now to the northeastern part of the United States.
Perhaps unsurprisingly, the most expensive counties in New York and other parts of the Northeast continue to be losers in the income migration game, while states like Rhode Island continue to be net income migration winners. In looking at Michigan, the animation also shows the weakness in the automobile industry.
Lastly, to the South – here’s what the net income migration data looks like for the southern part of the U.S.
In general, counties in Florida were big winners of income migration, in addition to the Carolinas and the previously mentioned strength in Texas.
Overall, and no doubt unsurprisingly, the IRS data show that about $20 billion in income, or about $100 billion in wealth, shifts between states each year. The shifting slowed down during the recent recession, and has since been on a strong growth path. In terms of magnitude, the $20 billion in income represents about 0.2 percent of total expected income in the U.S. for 2013. The $100 billion in wealth also represents about 0.2 percent of the total wealth of businesses and individuals living in the U.S.
With the shift in income established, the second question is – how does the net income migration connect with tax burden by state?
The following map and bar chart shows tax burden per household by state for the 2012 calendar year (most recently available data).
Overall, Alaska imposes the highest tax burden per household, followed North Dakota, Hawaii, Vermont and Connecticut.
The figures are somewhat skewed by states with large natural resources. For instance, Alaska shows up as the state with the highest per-household tax burden although the vast majority of taxes paid in the state are from a severance tax on oil production.
Instead of focusing on total state tax burden, the following is a look at just the income tax.
Why income tax? The simple answer is that income tax is the most often mentioned tax to cause individuals and businesses to move to a lower-taxed state.
The following map and bar chart shows income tax burden by state.
Overall, nine states have opted for no income tax, including Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. Two of these states – New Hampshire and Tennessee – are not completely free from income tax liability. In New Hampshire and Tennessee, the state imposes a tax similar to an income tax on dividend and interest income.
In terms of states where individuals can expect the highest tax liability, New York shows up on top at about $5,300 per household. New York is followed by Connecticut, Massachusetts, California and Minnesota.
With the income tax burden per household and the net income migration figures established, here is a plot of the two side-by-side.
With some exceptions, the two issues look connected. The green net income gaining states largely coincide with the green lower than average income tax burdens per household states.
The maps, of course, do not prove causation or correlation. That’s up to the statisticians, or really, the individual evaluating the evidence.
With that said, what is the general connection between income tax burden per household and net income migration?
In doing some simple math, the connection comes out to about $110,000. The $110,000 means that a $500 increase in income tax burden per household (in California, a $500 per household increase equates to a total state income tax increase of $6.5 billion) equates to an expected decrease in net migration income of $55 million at the average. For larger states, the $55 million is higher, such as California, where the figure comes out to about $100 million.
Does the $100 million seem small compared to the $6.5 billion tax increase? After all, it’s only about two percent. Well, that depends on perspective. One thing to keep in mind is that the $100 million is only the year one figure. The migration-induced tax change grows over time, to where after seven or eight years the net income outflow approaches $1 billion.
Overall, about $20 billion in income and about $100 billion in wealth continues to shift between states each year. Interestingly, states with no income tax are generally seeing an increase in net income from individuals moving from state to state, while the opposite holds true for high income tax states.
About R.T. Young
R.T. Young, Ph.D. Business Economics
R.T. is a business economist and angel investor. R.T. spends his days doing advanced statistical analysis and writing for businesses and elected officials across the United States, Europe and Asia. In his off-time, R.T. enjoys basketball, football, baseball and most any other sport. R.T. holds a Ph.D. in business economics and a bachelor’s degree in physics.
Other posts by R.T. Young:
- Fed Policy and its Effect on MSAs
- What Has the Minimum Wage Done Across Time, and What Does it Have to do With Employment?
- Venture Capital: Where Will the Money Move to Next and Where Has It Been?
- Unemployment Across Time and Space: Will the State Differences Stay Around Forever?
- What matters more when it comes to moving between states: weather or taxes?