Tax Flight is a Myth: Higher State Taxes Bring More Revenue, Not More Migration

Three reports show compelling evidence that taxes alone do not determine where a business decides to locate.

A report by the Center on Budget & Policy Priorities shows that the “effects of tax increases on migration are, at most, small — so small that states that raise income taxes on the most affluent households can be assured of a substantial net gain in revenue.” The basic facts, as the report explains, are as follows:

• Migration is not common and on average, just 1.7 percent of U.S. residents moved from one state to another per year between 2001 and 2010. And “when people do relocate, a large body of scholarly evidence shows that they do so primarily for new jobs, cheaper housing, or a better climate, among others."
• The migration that’s occurring is much more likely to be driven by cheaper housing than by lower taxes. Florida, for example, had no corporate tax but in the latter half of the 2000s, “the previously rapid influx of U.S. migrants into Florida slowed and then reversed — Florida actually started losing population. The state enacted no tax policy change that can explain this reversal. What did change was housing prices.”
• Recent research shows income tax increases cause little or no interstate migration. A study of the potential migration impact is of New Jersey’s 2004 tax increase on filers with incomes exceeding $500,000. The authors estimated, while those who left NJ cost the state an estimated $16.4 million in tax revenue, the revenue gain from the tax increase over those years was an estimated $3.77 billion, meaning that out-migration reduced the estimated revenue gain from the tax increase by a mere 0.4 percent.
• Low taxes can prevent a state from maintaining the kinds of high-quality public services that potential migrants value. Studies show that such amenities as cultural facilities, recreational opportunities, and good public services are powerful attractions for potential migrants. Many of those services are financed with tax dollars. Therefore, while low taxes decrease the cost of living, they might also prevent states from preserving or improving valued public services, which would discourage potential migrants.

Reports by Ernst & Young (Total state and local business taxes (2010), and Competitiveness of state and local business taxes on new investment (2010)) suggest that when it comes to attracting business, taxes alone do not determine where businesses locate. Businesses also factors in a skilled and educated workforce, a temperate climate, a high level of public services and recreational opportunities.