In his most recent New York Times column, Greg Mankiw argued that competition among states helps keep taxes low: “If people feel that their taxes exceed the value of their public services, they can go elsewhere. They can, as economists put it, vote with their feet.”
Okay, so what about the small number of people who do switch states? The CBPP study argues that taxes are often much less significant than housing costs. For example, between 2004 and 2007, Arizona was the most popular destination for outgoing Californians. But it’s not clear that this was due to taxes. Indeed, many middle-income and upper-middle-income families actually faced higher local taxes in Arizona. More likely, many of them moved because of housing. Homes are much, much cheaper in Arizona, and the report calculates that the average middle-class family could reduce its mortgage costs by 24 percentage points by moving from California.
Now, as Mankiw suggests in his column, maybe we should just restrict our focus on a small subset of the population — the wealthiest, and most mobile, residents. “If you are going to take from Peter to pay Paul, Peter may well decide to leave,” Mankiw writes. “It is perhaps no surprise that state and local tax systems are less progressive than the federal one.”
But even here, the CBPP analysis found that the effect of progressive taxation on migration appears to be quite modest. The most careful recent study (pdf) looked at what happened in New Jersey after the state passed a tax increase on incomes exceeding $500,000. The results: “At most the authors estimated, 70 tax filers earning more than $500,000 might have left New Jersey between 2004 and 2007 because of the tax increase, costing the state an estimated $16.4 million in tax revenue.”
By contrast, CBPP notes, New Jersey gained about $3.77 billion in revenue from the tax increase. The state gained more far revenue than it lost, suggesting that the threat of fleeing high-earning residents isn’t always a major deterrent to lawmakers.
In fairness, this research doesn’t necessarily contradict Mankiw’s broader point. It’s possible that many state legislatures really do act as if “voting with your feet” were true and remain leery of raising taxes. That is, even if Americans don’t often move because of taxes, states might compete on taxes anyway. Also, Mankiw’s column mentions taxes and services, and it seems very plausible that states could attract residents for a mix of policy reasons, including school quality and public safety.
But on the narrow issue of taxes, this is CBPP’s bottom line: “It would not be credible to argue that no one ever moves to a new state because of the desire to live someplace where taxes are lower. But neither is it credible to say that taxes are a primary motivation, nor that migration has a large impact on the revenue impact of tax measures.”
Update: Most of the above research discusses individuals and families. But, of course, businesses might seek out low-tax states too. Even here, however, the story is fairly complicated, as Case Western University’s Scott Shane explains in this column: “State taxes do little to influence where entrepreneurs choose to operate. That’s because no state has the ‘best’ tax policy for all entrepreneurs. Rather, different states have tax policies that suit certain types of companies.”