Politics & Policy

Why States Prosper (or Decline)

Low taxes, opportunity, and warm weather attract migrants.

Finally, after being headquartered in Torrance, Calif., for half a century, Toyota has had enough of California’s anti-business, anti-growth policies and is packing its bags and moving to Plano, Texas, where the contrast couldn’t be greater. And Toyota is not alone in fleeing California.

You can tell a lot about the hot spots in America by tracking where Americans are moving to and where they are running from. Every year, about 3 million Americans move from one state to another; the combined adjusted gross incomes (AGI) of these movers and shakers is over $140 billion. Last week, the IRS released its latest data for tax year 2010 (filing year 2011) on the migration patterns of Americans and how much income they bring into and out of each state. The new report is an eye-opener, and we only hope those who are talking wistfully about 80 percent tax rates will pay attention. It has been true for a long time that taxes redistribute people, not wealth — and it’s never been truer than it is today.

#ad#One thing we can discern from these data is that Americans are still highly attracted to warm weather and sunshine: Florida, South Carolina, and Arizona were the three biggest winners in terms of net increase in income from new arrivals. But a 70-degree temperature and blue skies aren’t the only factors moving people around. In percentage terms, states like Wyoming, South Dakota, and Idaho were big winners too.

The policy conclusion that leaps off the pages from these interstate-migration patterns is that Americans are voting with their feet against liberalism — high taxes and debt, heavy regulation, and union domination. Look at the ten states that lost the most adjusted gross income on net (meaning the AGI of leavers minus the AGI of new entrants, divided by the AGI of the state’s non-migrants):

States with the Largest Loss of AGI Due to Domestic Migration as a Share of Total State AGI, Tax Year 2010 / Filing Year 2011

Rank

State

1-year

Change in

AGI due to

Domestic

Migration

50

New York

–0.64%

49

New Jersey

–0.64%

48

Illinois

–0.63%

47

Rhode Island

–0.57%

46

Ohio

–0.53%

45

Alaska

–0.53%

44

Michigan

–0.52%

43

Kansas

–0.35%

42

Missouri

–0.32%

41

Iowa

–0.32%

These numbers may look small, but they’re actually substantial losses: Once a person has left a state, he usually stays gone for quite a while. While the numbers reported are for only one year, if these trends hold up over a decade, these states could surrender between 5 and 10 percent of their total income to other states.

What do these losers have in common? Well, the four biggest losers are about the most politically liberal states in the nation, and the sixth biggest — Alaska — is ridiculously cold and dark.

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Other big losers include Ohio and Michigan, which have been in decline for many years but seem to be finally turning a corner. We’ll have to wait for the IRS to release more-current data, but we expect to see Ohio and Michigan beginning to reverse their 50-year-long swan dives. Examining the long-term data going back two decades, we find that these current loser states have typically been found in the bottom of the rankings.

#ad#There is no single reason people are leaving these states, but certainly a shortage of jobs is near the top of the list. The losers are also almost all states with very high income-tax rates, and all of them have forced-union rules. These two policy mistakes, as we demonstrate in our new book An Inquiry into the Nature and Causes of the Wealth of States, are serious job killers (Michigan has since become a right-to-work state, but was still a forced-union state during the period covered by the IRS data).

Now let’s look at the big winning states in terms of net AGI gains:

States with the Largest Gain of AGI Due to Domestic Migration as a Share of Total State AGI, Tax Year 2010 / Filing Year 2011

Rank

State

1-year

Change in

AGI due to

Domestic

Migration

1

Florida

+1.44%

2

South Carolina

+1.09%

3

Arizona

+0.61%

4

Wyoming

+0.60%

5

South Dakota

+0.57%

6

Idaho

+0.56%

7

Colorado

+0.53%

8

Nevada

+0.52%

9

Texas

+0.52%

10

North Carolina

+0.51%

Texas and Florida imported by far the most total income from other states, bringing a combined net $7.3 billion into their states in a single year. By the way, both Texas and Florida have no income tax. Neither does Nevada, South Dakota, or Wyoming. Do you think tax rates matter in America?

A new website, SaveTaxesByMoving.com, finds that even middle-class families can save hundreds of thousands of dollars over a working life by moving from a high-income-tax state like California to a zero-earned-income-tax state like Tennessee.

Just so people don’t think we are cherry-picking the data here: There are nine states in the U.S. without an income tax, and in tax year 2010, every one of them except Alaska gained income from the other 41 states. This may be a coincidence, but that’s highly doubtful, especially since the pattern has sustained itself for many years.

A more reasonable conclusion is that tax rates really do affect incentives and decisions. Barack Obama and the New York Times may long for high taxes, but most Americans would rather avoid them. High taxes are also job killers, so Americans who are unemployed also tend to move away from high-tax states.​

Liberals in Washington who want to sock it to the rich have never been able to explain why voters are turning their backs on this big-government model, which has created anything but a worker’s paradise in the states.

— Stephen Moore is the chief economist at the Heritage Foundation. Arthur B. Laffer is the founder and chairman of Laffer Associates and was an adviser to President Reagan. They are co-authors of An Inquiry into the Nature and Causes of the Wealth of States (Wiley, 2014).

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