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Domestic Tax Refugees?



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The Tax Foundation has just released a study about migration patterns among the states. To no one’s great surprise, New York and Pennsylvania have lost a great number of people to Florida, and the authors suggest that relative rates of taxation are an important factor in the trend. The New York Times is skeptical of this explanation.

I am agnostic about the role of taxation, inasmuch as there isn’t much in the data to indicate how big a role relative tax rates played. It is true that low-state states account for a great deal of the out-migration from high-tax states, but the reverse also is true: Texas has seen more of its citizens move to high-tax California than to any other state, while Florida has seen more emigration to high-tax New York than to any other state except neighboring Georgia. Arizona has seen many more residents relocate to high-tax California than to low-tax Texas. Massachusetts sends more people to Florida than to any other state, with New Hampshire running a close second, but the next most popular destinations are hardly tax havens: New York, California, Connecticut, and Rhode Island.

Proximity seems to be a factor in many cases: People move frequently to neighboring states. But Nevada sends more people to neighboring California than it does to the rest of the states it borders (Arizona, Utah, Idaho, and Oregon) combined.

I suspect that there are some mediating factors in here. People may not be moving to Texas because of low taxes per se, but because the state’s business environment — relatively low taxes, sensible regulation, a friendly legal climate — has produced job growth. If you’re unemployed in Texas or Florida but get offered a good job in a relatively high-tax state, you have a pretty solid incentive to move there, since 92.5 percent of something is a lot better than 100 percent of nothing. (Texas’s universities graduate a great number of top-flight engineers every year, and it is likely that many of them end up in Silicon Valley.) An important consideration is that many high-tax states have fewer employment opportunities, and taxes are not the only reason for that; high-tax states also tend to be less business-friendly in other ways. Even if taxes and the cost of living were identical, you’d rather practice medicine in Houston than in Philadelphia, because the chances of suffering a ruinous judgment in a questionable malpractice lawsuit are lower.

#more#So while Andrew Rosenthal at the Times is correct to be skeptical, his take still managed to be kind of dumb:

I’ll give the last word to Mayor Mike Bloomberg, also known as the richest man in New York City. Asked in 2008 if state tax hikes on the wealthy would cause them to leave, he said, “I can only tell you, among my friends, I’ve never heard one person say I’m going to move out of the city because of the taxes. Not one. Not in all the years I’ve lived here. You know, they can complain, ‘Ugh, I got my tax bill, it’s heavy.’ But my friends all want to live here.”

Single-data-point explanations are questionable in all circumstances, but even more so when your single data point is named Mayor Bloomberg. I suspect that billionaire political dilettantes and their dearest friends do not tell us very much about the incentive effects of local tax rates. For one thing, the sample size is small. More important, high taxes in New York City do not lower the real quality of life for guys like Mike Bloomberg, who would not miss a few million here and there in extra taxes or benefit much from a few million here and there in tax savings. (This is why it is so deeply stupid to use Warren Buffett as Exhibit A in arguing for a tax plan that would raise rates on people making $250,000 a year.) The marginal utility of an after-tax dollar is pretty low for a billionaire. New York City has much more to offer to people with effectively bottomless pockets than does Dallas or Miami, as nice as those places are.

But local and regional economies are not usually built on billionaires. I’d be more interested in a study that tracks those who are relatively affluent but not in the Ferrari-owning demographic, i.e. professionals and entrepreneurs who have choices about where they live but who are not so rich that local tax rates don’t really matter. The poor don’t move around much, because they can’t, and it would take a great deal to tax Mike Bloomberg’s pinstriped butt off of his $1 million sofa, but a computer programmer making $200,000 a year has good reason to choose Austin over Palo Alto, ceteris paribus, and a retiree with a $1 million net worth is better off in Winter Park than the Upper West Side.

It also matters what kind of spending those taxes are funding. Texas has spent a lot of money in the past decade accommodating growth; New York is spending a lot of money to manage decline. 



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