A new report released from the nonpartisan think tank Center on Budget and Policy Priorities on Wednesday contradicts the notion that residents of high tax states rates are moving to states with lower taxes primarily because of tax rates, a tax policy discussions point sometimes raised by proponents of raising or eliminating the deduction cap on state and local taxes.
Per the report, “State tax levels have little effect on whether and where people move certainly not to a degree that should lead state policymakers to enact unaffordable tax cuts to attract people or avoid enacting productive increases focused on the wealthy.”
The report’s author believes fundamental lifestyle decisions are the driving forces of migration. “The main reasons people move to other states are related to job opportunities, family needs, and housing costs, not because they want to pay lower state and local taxes,” said Michael Mazerov, senior fellow, CBPP.
The report also rings the warning bell about states attempting to stem a “tax flight” condition by cutting or eliminating taxes. Earlier this year flush state budgets in Oregon and Colorado resulted in constitutionally-enforced kickbacks to taxpayers.
Per the report “lawmakers in states like Iowa, Mississippi, Nebraska, and West Virginia that have recently cut their income taxes should harbor no illusions that such a move will stem, let alone reverse, their states’ long-standing net out-migration trends.”
The report notes that the cuts may make things worse by diverting funding away from education, public safety, parks, roads, and critical infrastructure, making the state a less desirable place to live.
The report questions the importance of taxes on migration, but the overall numbers still show a move away from high tax states. “The evidence is overwhelming that migration is higher to low tax states than to high tax states,” said Jared Walczak, VP, state projects, Tax Foundation. “That is driven, at least in part by direct tax burdens, and substantially by indirect tax burdens.”
The report examined U.S. Census and Internal Revenue Service data to reveal that interstate moves are decreasing, and large numbers of households move into higher tax states every year including people moving from states with no income tax. Wealthy households making about $200,000 represent less than 25% of total net out-migration in every higher-tax state. The report states that the “vast majority of interstate moves are from one low-tax state to another and one higher-tax state to another.”
Migration, politics and tax policy strategies are frequently tangled by politicians representing high tax states promoting legislation to amend the SALT cap deduction. The SALT deduction was capped at $10,000 as part of the 2017 Tax Cuts and Jobs Act. Critics of the policy claim the law is unfair for residents of high tax states while muni issuers say the cap infringes on their sovereign ability to levy future taxes.
Policy experts on the academic side remain skeptical of the impact. Mazerov notes that his report cites two academic studies that looked explicitly at the effect on migration of the SALT cap and found minimal effects.
Walczak points to migration trends that were already underway before the cap was put on SALT while conceding the cap accentuates the differences. “Manhattan New York is way more expensive than Manhattan Kansas, but people choose to live there, because they like what living in Manhattan has to offer. More people would choose to live there if it cost less and there are people who will leave Manhattan because it costs too much.”