What do people in high-tax cities and states do? They move
Businessman and investor Kevin O’Leary recently described cities such as SJ and NYC as “uninvestable” with “insane” policies and taxes that are too high. The result? Revenue and population outflow. He digs into the data for The Herman Center.
State and local income tax rates in California, New York, and New Jersey are two to three times higher than in most other states.
California has a top income tax rate of 13.3 percent, New York has a top rate of 10.9 percent (but up to 14.776 percent in New York City), and New Jersey has a top rate of 10.75 percent.
In addition, these states have high regulatory burdens, high production costs, and a high risk of litigation.
Business migration out of these states is a common occurrence. California, New York, New Jersey, and Massachusetts are all in the top five of U.S. states losing population to interstate migration.
Hundreds of companies have moved headquarters and jobs out of California alone.
It is not just corporations and the very wealthy who are fleeing from high-tax states. High-tax states lose almost 1 million people per year to lower-tax states, only a small fraction of whom are company CEOs or multimillionaires.
Californians and New Yorkers from all walks of life have chosen to leave.
There may be no better simple measure of states’ desirability than their net population gain or loss from interstate migration. It shows how many people are willing to pay the necessary price to become residents of different states. Differences in public policies such as taxes, regulations, and criminal law enforcement affect how livable states are.
California was the leading source of net domestic migration into every state whose center of population is within 1,000 miles of either Los Angeles or San Francisco. California was also the biggest source of net domestic migration to states as far away as Georgia and Tennessee.
From 2020 to 2023, this pattern of Americans moving to states with lower taxes has resulted in large population shifts. The 10 states that have the highest taxes as a share of state GDP (the top quintile) lost 2.3 million residents to interstate migration, and the 10 states with the lowest taxes (the bottom quintile) gained 2.1 million residents from interstate migration. The quintile with the second-highest taxes lost about 430,000 residents, the middle quintile gained about 28,000 residents, and the quintile with the second-lowest taxes gained about 651,000 residents.
All taxes impose some degree of burden on individuals and the economy, taking money away from the people who earned it and giving it to the government to spend or redistribute. However, the harm caused by taxes extends beyond just the dollars that are transferred from private hands to the government. The harm of taxes also includes or can include:
Discouragement of work, saving, investment, entrepreneurship, and other productive behaviors:
Encouragement of tax avoidance (including moving for tax reasons);
Distortion of price signals relied on by producers and consumers;
Costly administration and compliance burdens;
Empowerment of the government to pick winners and losers; and
Encouragement of lobbying, corruption, and black markets.
Many researchers have concluded that taxes on income—including ordinary income taxes, capital gains taxes, and corporate income taxes—are the most harmful common type of tax.
The direct reason that everyday people may cite for leaving a state may be related to the housing market, the cost of living, or differences in job opportunities—but high taxes and bad governance exacerbate problems in all these areas. The consistency with which Americans gravitate toward lower-tax states defies random chance, so the connection between high taxes and outmigration cannot be dismissed.
However, good policies also tend to run in packs, so it would be a mistake to conclude that tax policy alone fully causes the net migration between high-tax states and low-tax states. Governments that keep the taxes on their citizens low are more likely to have other sound policies. They are more likely to act as faithful stewards of taxpayer dollars, focusing their attention on the core functions of government and avoiding excessive regulations or job-killing welfare programs. States that impose high taxes have fewer safeguards against government waste, regulatory meddling, and bureaucratic red tape.
Read the whole thing here.
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