State Taxes and Migration

When taxpayers examine the ways in which they can modify their behavior and get the most “bang for the buck” in terms of reducing taxes, moving to a different state is high on the list.  People’s income tax burdens can differ dramatically depending on where they are residents.  For example, Texas has no income tax.  California, on the other hand, has a top rate of 13.3 percent.  Moreover, that 13.3 percent rate on California residents is not reduced for capital gains.  By comparison, the top federal income tax rate is 39.6 percent, but the top federal capital gains rate is 23.8 percent (which includes a 3.8 percent Medicare tax).  A person earning $10 million in California in 2013 will pay almost $1.3 million in income taxes, whereas the person would pay zero in income taxes if he or she moved to Texas.

Data supports the claim that capital flows to the states where it is treated well.  These differences can become staggering over time.  Investor’s Business Daily examined IRS records and found that Texas and Florida (neither of which has an income tax) over the last 15 years have gained $20 billion and $84 billion, respectively, in annual adjusted gross income as a result of migration, whereas high-tax New York, California and Illinois lost $58 billion, $32 billion, and $26 billion of annual adjusted gross income, respectively.  Moreover, these numbers understate the loss high-tax states suffer as a result of these migrations, because they do not take into account other taxes (such as sales taxes and property taxes)  these states lose, as well as the economic activity their spending generates.

A 2010 study by economists W. Michael Cox and Richard Alm examined IRS data and found a strong correlation between marginal state tax rates and the migration of taxpayers from 2004 to 2008.  Specifically, they found for every one percent increase in the state income tax rate, net migration declined by about 4,500 per year.  The tax-saving implications of migration may become an even more relevant hotter topic in the future.  Illinois and California recently raised income taxes, whereas states such as Oklahoma and Missouri are considering abolishing their income taxes.