Tax policy shapes migration flows

By John Hood

Raleigh, NC – North Carolina is a popular destination for those seeking to make a new life in a new state. According to a tracking report by United Van Lines, we ranked sixth in the nation for inbound migration during 2020.

I should hasten to add, fellow Tar Heels, that we ought not to puff out our chests too much. South Carolina ranked second.

The closer you look at patterns of interstate relocation, the more complex those patterns appear. Don’t assume everyone moves towards warmer weather. Don’t assume everyone moves towards urban centers, or away from them, or to places with low housing prices, or high test scores, or where one’s preferred political party is in charge.

Plenty of people do each of these things. But America is a big country full of people with big dreams that don’t necessarily match up with the big dreams of others. Tastes vary, as does tolerance for risk. And what attracts a 70-year-old to a new state can be very different from what that same person might have found attractive at 30.

Conservatives have long argued that tax policy plays a role in attracting or repelling interstate migrants — and we’re right! Dozens of peer-reviewed academic studies have confirmed a relationship between migration and either overall tax burdens or certain tax rates.

The latest research I’ve seen was just published in the Journal of the American Taxation Association (hey, now, don’t smirk at me — my reading diet happens to range widely across journals and magazines). Kansas State University’s Amy Hageman and the University of Central Florida’s Sean Robb and Jason Schwebke examined migration data for the years 2008 through 2015.

Adjusting for a host of control variables, they found that states with lower overall tax burdens tended to attract more inbound migration. They also found a negative association between inbound migration and high income taxes, high property taxes, and high taxes on the sale of certain goods and services.

In a finding some observers may find surprising, Hageman, Robb, and Schwebke found that high property and sales taxes were more likely to discourage inbound migration than high income taxes were. Others studies have yielded different results on that question.

I wasn’t as surprised as some conservatives might be see their result. My reading of the evidence is that income taxes are especially unattractive to investors, those who own or would like to own a business, and professionals with higher-than-average incomes. There are plenty of people in those categories, naturally, and if you chase them away from your state with high income taxes, the economic losses are often broadly shared. But for other would-be movers, property taxes or even sales taxes can be a bigger turnoff. It depends on individual circumstances.

To say that taxes matter in relocation decisions is not to say that they are always, or even usually, decisive. Lots of other factors enter into the equation. Americans with a taste for smaller government, lower taxes, and less regulation may also like urban amenities, or proximity to water, or proximity to family. They’re going to mix and match accordingly.

Among the top 10 states in inbound migration in 2020, for example, three were not in the Sunbelt: Idaho, South Dakota, and Oregon. The first two have no state income tax. Oregon, on the other hand, has an income tax but no state sales tax.

The migration leaders in the Southeast were South Carolina (#2), North Carolina (#6), Tennessee (#7), Alabama (#8), Florida (#9), and Arkansas (#10). Among them, North Carolina, Tennessee, and Florida get good scores on the Tax Foundation’s State Business Tax Climate Index. South Carolina, Alabama, and Arkansas get bad scores.

My point is that there is no single characteristic, amenity, or policy choice that explains why people live where they live and move where they move. All other things being equal, places with greater economic freedom tend to attract more residents. Politicians ought to act accordingly. Just don’t expect to produce miracles.

John Hood is a Carolina Journal columnist and author of the forthcoming novel Mountain Folk, a historical fantasy set during the American Revolution.