I previous published thoughts on HNWI migration trends –
https://htj.tax/2021/04/the-myth-of-millionaire-tax-flight/
Now let’s talk about migration within the USA
Fiscal federalism theory tells us that mobile individuals might respond to tax differentials by moving to another state. To the extent that is true, states that impose progressive taxes will be frustrated by high-income taxpayers who relocate. Regardless of how voters in different states vary in their preferences for how the tax burden is distributed, there is a strong case for leaving the redistribution of income to the federal government.
For anybody glancing at the state migration data published by the Statistics of Income division of the IRS, those warnings seem well founded. Table 1 shows that the two states with by far the highest net immigration gains over the most recent seven-year period for which data are available are Florida, with an inflow of about 1.3 million individuals, and Texas, with an inflow of about 850,000. Neither state imposes an individual income tax.
Table 1 also shows that by far the two states with the most net immigration losses are California, with an outflow of about 1.5 million individuals, and New York, with an outflow of about 1.4 million. Both states have top individual income tax rates that exceed 10 percent. Those and similar facts strongly suggest — at least to your author — that outcomes predicted by fiscal federalism for mobile individuals are a prominent feature of the U.S. fiscal landscape.
Not So Fast
On closer inspection, however, the effect of state taxes on relocation across state borders might not be so important after all. To understand, consider three alternative presentations of the same underlying data. First, as illustrated in the figure, the cited net interstate migration flows are a combination of inflows and outflows, each much larger than the net effect. If taxes were the only factor in individuals’ relocation decisions, the 3.2 million of outflows from Florida and the 3.1 million of outflows from Texas would be closer to zero.
More detailed SOI data show that between 2021 and 2022, for example, 90 percent of interstate moves out of Florida were to states with income taxes. As for Texas, between 2021 and 2022 more than 89 percent of interstate moves were to states with income taxes. High-tax California was the most favored destination for those leaving Texas. Yes, people sometimes do things that aren’t the most tax-efficient because some things in life are more important.
The opposite phenomenon can be observed in high-tax states. The data show large inflows of taxpayers into high-tax states. From 2015 through 2022, California had inflows of 3 million individuals and New York had inflows of 1.9 million. Most of those inflows were from states with lower or zero tax rates.
The gross inflow and outflow shown in the figure tell us that state income taxes are only a small part of relocation decisions in the aggregate.
Putting it all together, the net inflow data in Table 1 shows that state income taxes affect migration patterns. But the gross inflow and outflow shown in the figure tell us that state income taxes are only a small part of relocation decisions in the aggregate. Those results are consistent with a 2011 study that found that while some high-income earners move to states with lower taxes, the overall effect of tax rates on migration is relatively small. (Cristobal Young and Charles Varner, “Millionaire Migration and State Taxation of Top Incomes: Evidence From a Natural Experiment,” Nat’l Tax J. 255 (June 2011).)
More Perspective
The attention-grabbing numbers in Table 1 are from the four most populous states — California, Texas, Florida, and New York — which by chance are among the states with the highest and lowest tax rates. The effects of taxes on net migrations are pronounced, but are they large in proportion to the size of these states? Table 2 expresses net migration of states as a proportion of the total population of individuals to tax returns in each state.
Table 2 offers a better perspective on how state income taxes affect net migration. While some states with low tax rates — like Florida and Nevada — still receive a considerable amount of inward net migration relative to their populations, their inflows relative to their sizes are not out of line with states that have significant income tax rates, like South Carolina and Idaho. On the right-hand side of Table 2, we see that high-tax jurisdictions — like the District of Columbia and New York — suffer their share of migration outflows, but so do low-tax states like North Dakota and Louisiana.
But contrary to the theory of fiscal federalism, three states with low tax rates have net outward migration by households with AGI that exceeds $200,000.
In Table 3 we further explore the available data for evidence of relationships between state individual income tax rates and migration. First, we focus exclusively on the migration of individuals with federal tax returns with more than $200,000 of adjusted gross income. At the top of the table, we can see that states with no income taxes all have net inward migration. But contrary to the theory of fiscal federalism, three states with low rates have net outward migration by households with AGI that exceeds $200,000. Table 3 shows that several states — Oregon and Vermont, for example — on net attract high-income taxpayers despite high income tax rates.
In Table 3 we also compare net migration rates of high-income taxpayers (AGI over 200,000) and lower-income taxpayers (AGI between $25,000 and $50,000). Our expectation is that the top tax rates shown in the table would have a greater effect on the migration behavior of high-income taxpayers. For example, we see that for income over $200,000, Florida has a net inward immigration rate of 3.7 percent. That is much larger than the 0.6 percent rate for low-income households, strongly suggesting that taxes matter in deciding to move to or from Florida.
For high tax-rate states we expect the opposite, and we do observe that, for example, in New Jersey, where high-income taxpayers on net leave the state at a high rate (0.6 percent) relative to low-income taxpayers (0.4 percent). But the expected pattern isn’t always present. For example, in South Carolina and Maine, the net inward migration rate is larger for high-income than low-income taxpayers, despite the relatively high tax rates in those states.
For those seeking clear answers, might we suggest that you can’t escape the complexity of reality? (That’s for politicians and ideologues.) What is the role of state income tax in individuals’ location decisions? Like so many things affected by tax, it seems that interstate migration is sometimes affected by state income taxes, but it’s usually just on the margin.
