In recent months, a number of important firms have announced they are relocating from California to Texas. An article by Peter Yared discussing this trend had a graphic that caught my eye:
The movement of these industries is toward three states that have one thing in common—no state income tax. And these are the only three states with no income tax in the southeastern quadrant of the US—say Texas to Florida and south of the Ohio River.
Progressives often discount the supply side effects of tax changes, pointing to examples such as Kansas where tax cuts had little effect. But Kansas lacks the sort of big cities that would typically draw these firms and its tax cuts were relatively modest. If you are looking for a low tax state on the Great Plains, South Dakota has no state income tax at all. The top rate in Kansas (5.7%) is higher than in Massachusetts (5.0%). That won’t get the job done.
Miami clearly benefits from a mild climate, but Tennessee and Texas have climates that are only average for a southern state.
I’m certainly not a rabid supply sider who thinks that tax rates are all important. But a person would have to be pretty blind to ignore the migration of firms from places like New York, New Jersey and California, to lower tax places.
Interestingly, Washington State has no income tax, which is unique for a northern state with a big city. Washington is also home to the two of the three richest people on the planet (the other–Elon Musk–just announced he’s moving from California to Texas.) Beyond these anecdotes, Washington is also experiencing rapid population growth, which is also unique for a northern state with a big city. Indeed it’s growing even faster than Oregon, which has a slightly nicer climate.
There’s no doubt that climate has been reshaping America in the decades since air conditioning was invented, with people moving to warmer locations. But for the first time ever (AFAIK), California saw its population fall last year, and yet it has a delightful climate (even with the recent forest fires.) High tax Hawaii also lost population.
So while people are gradually moving to warmer locations, state tax policies explain why certain states attract a disproportionate share of the migrants. Indeed, last year more that half of the US population growth occurred in just two states—Texas and Florida. I believe that’s the first time that has ever happened. Add in Tennessee and Washington and you are at nearly two thirds of the nation’s population growth. Recent limits on the deductibility of state and local taxes has exacerbated this trend.
PS. Technically, Tennessee has no wage tax. However, they do tax interest and dividends at 1%. But even that small tax is being phased out at the end of this year.
PPS. Yes, housing policies are another big factor in migration—especially for the middle class.
Happy Holidays everyone!
READER COMMENTS
Bacon Wrapped
Dec 25 2020 at 6:40pm
My employer is one of the HQ movers. For us I’m told it’s the bigger expense picture, not just taxes
1. California labor costs are too high at every career level
2. Texas and Tennessee are viewed as having lower costs, higher productivity talent pools due local universities.
3. Taxes
Mark Brophy
Dec 25 2020 at 9:09pm
California labor costs are high because few people will move there without a raise to pay the higher taxes and housing costs.
Scott Sumner
Dec 25 2020 at 11:51pm
Good point.
Liam
Dec 25 2020 at 7:02pm
I notice I am skeptical.
The author of the linked piece cites only anecdotal sources, and also happens to have just moved to Miami himself, so has a likely bias towards seeing that connection.
I will withhold judgment until I see the data (not that there really are any).
Mark Z
Dec 25 2020 at 7:56pm
Data on migration patterns, state tax rates, or the putative association between them? There is very clear data on migration patterns, and there’s also been a good deal of research on the relationship between state tax rates and migration. This Cato link has plenty of numbers making clear that there’s a strong correlation between state tax levels and migration. Obviously it’s difficult to separate tax levels from other variables, and studies come to varying conclusions, but most find statistically significant affects on migration patterns; e.g. a study of the effect of new Jersey’s 2004 millionaire tax; a Montana study found a negative affect on in-migration but no effect on out-migration; a study by the SF Fed found significant affects for top earners especially. From my cursory search it does seem most studies (including those commissioned by state governments) find statistically significant affects, especially for high earners.
Jim Dunning
Dec 25 2020 at 8:34pm
Can numerous direct links to news stories on over half-dozen of the migrating firms Yared cites be characterized as “anecdotal”?
Scott Sumner
Dec 25 2020 at 11:53pm
The population data clearly shows that people are moving from high tax states to low tax states, so I’m not sure what you are referring to.
Michael Sandifer
Dec 25 2020 at 9:26pm
Coming from Houston and having visited my grandfather in the Austin area growing up, I take slight issue with the characterization of Austin climate. It’s barely north of Houston latitudinally, and is much more firmly subtropical than much of the south. Winters there are much milder than those in Nashville, Little Rock, or even Atlanta.
Scott Sumner
Dec 25 2020 at 11:55pm
The point is that all of Texas is growing fast, including DFW, which doesn’t have a very nice climate. And Nashville is no better than Atlanta.
In contrast, Mississippi, Louisiana, Arkansas, Alabama, etc., are not growing fast.
Michael Sandifer
Dec 26 2020 at 12:44am
Yes, I didn’t mean to distract from the main point, which seems very plausible. Also, I hear many business people leaving California and New York complaining about business regulation.
I’m surprised Nashville is only 4 or 5 degrees cooler than Atlanta, on average.
I love the hill country outside of Austin, by the way. If I were to move to another state within the US, the Austin area would be high on my list of destinations, along with south Florida.
Scott Sumner
Dec 26 2020 at 12:26pm
South Florida has a wonderful climate, but I find the flatness of Florida to be depressing. Austin is nice, as you say.
Mike
Dec 29 2020 at 4:58pm
As a business owner who moved from a blue state to a red state, I can confirm taxes matter but are not the entire picture. I moved from Washington to Tennessee which somewhat undercuts the point about state income taxes (but this was a factor – i wasn’t going to move to a state where i would have to start paying them). The biggest impact for me was the death by a thousand cuts that i felt as a business person in Washington. Big tech can survive and thrive there because the cost of compliance is easier for a big company to swallow, but small business people are either buried in the overhead of trying to comply with regulations at the state and local level OR are in constant non-compliance OR both. Taxes are a great indicator in most states of this “attitude” towards business, but Washington is an exception. The tide will turn there eventually as well when either Microsoft or Amazon blinks. The entire state is concentrated in the Seattle/Bellevue area and the concentration in a handful of companies is enormous.
Dale Doback
Dec 25 2020 at 9:51pm
You said:
“Progressives often discount the supply side effects of tax changes, pointing to examples such as Kansas where tax cuts had little effect.”
Is this really what progressives say though? I recall reading about the competing Kansas-Missouri tax incentives in Kansas City that were effective at convincing companies to move, but this came at the expense of public finances.
Scott Sumner
Dec 26 2020 at 12:57am
I seem to recall there was a bigger cut in business taxes in Kansas; perhaps that had some effect.
Jonathan Sawyer
Dec 25 2020 at 10:11pm
Why aren’t there more business relocations to Puerto Rico? No federal tax for corporations and there is a 4% territory corporate tax. Also, it is still in the USA so it doesn’t have the complications of relocating to the Caymans or Panama.
Scott Sumner
Dec 26 2020 at 12:57am
Good question. Perhaps there are productivity problems in Puerto Rico.
Alan Goldhammer
Dec 26 2020 at 9:08am
There used to be a huge tax preference for business in Puerto Rico (Section 936) that led to large investments by the pharma and medical device industries. This was gradually phased out under President Clinton and most of the companies eventually left.
Thomas Hutcheson
Dec 26 2020 at 6:14am
I agree that the phenomenon is real and have high hopes that this will lead to a less “conservative” Senate, but it does not seen to say anything about “supply side.” I understand “supply side” to mean that high rates of taxation or income or consumption would lead to withdrawal of valuable skilled labor and entrepreneurship from the market (or diverted into tax avoidance); that it affects the leisure/income or leisure/consumption margin.
TMC
Dec 26 2020 at 11:39am
“this will lead to a less “conservative” Senate”
Why would you hope that? Sounds like what has inspired the ‘welcome wagon’ movements in Texas, AZ and Colorado. AZ and CO. have seemed to have failed though. Basically the welcome wagon asks you not to continue voting for the same failed policies that made you move away from California.
Alan Goldhammer
Dec 26 2020 at 9:14am
California still has a large number of net positives going for it. A large port for Pacific Rim goods coming in, large agricultural base, and a superb university research infrastructure (both private and public) that is better than most every other state. The amount of technology transfer that goes on in biomedical and computer science is huge and if one looks at new company development, California is still going strong.
Housing is expensive, but not in all regions of the state. From a climate point of view, there are few areas in the US that can beat it. I grew up in San Diego and did my undergrad work at UC Santa Barbara. I certainly would not mind moving back to either place.
Yes there is a lot of in flow to Texas these days. Having spent time in that state over the years, the only areas that I would ever consider living in would be San Antonio or Austin. There is not enough money in the world to entice me to Houston.
Everett
Dec 27 2020 at 2:08pm
Don’t underestimate the wildfires.
The cities of Texas are better located in terms of sustaining sprawl (even discounting the abundance of parks around California coastal cities). But they do have notably higher property tax rates that would eventually catch up to California property taxes at a little over one-half the house price (and without Californie’s Prop. 13 that limits year-over-year tax increases).
My intuitive guess is that the relocation of companies (which as of now is more a relocation of the CEOs plus new factories and offices, not a full-up relocation) is in part motivated by the income tax that hits these CEOs particularly hard. Even with the increased property tax rate they’re still making out better by moving.
Phil H
Dec 27 2020 at 7:19pm
This is interesting and it may be a trend, of course. But it’s always important to remember that any factoid in isolation can be interpreted in many ways. For example, this one can be interpreted as suggesting that low tax states attract established businesses. Or it could be interpreted to mean that California and New York are more creative cities, and in general businesses incubate and grow there, before moving to other places. Or that low tax Texas is not very good at growing its own businesses, leaving market gaps that companies from elsewhere rush to fill.
robc
Dec 27 2020 at 11:14pm
From a quick Google search, Forbes best and worst states to start a business had Florida (2), Texas (3), and California (5) near the top. Your idea was plausible but easily refuted.
The bottom 10 was the northeast and the deep south. Interesting that Ga, FL, and TX are top 10, but AL, MS, and LA are bottom 10.
robc
Dec 27 2020 at 11:17pm
Correction: arkansas, not mississippi, was bottom 10.
Josh R
Dec 27 2020 at 10:54pm
Isn’t the elephant in the room that most of these people relocating are equity holders in this year’s significant IPOs and are simply setting themselves up for paying no state tax when they sell their stock in 2021? It’s the perfect storm with the pandemic allowing ppl to relocate whilst establishing new residency and the stock market booming.
sean
Dec 28 2020 at 12:51pm
I’m going thru this process right now. Moving from Chicago. Most of my friends have already left for Houston or Miami. Both have better energy. I’ve booked airbnb for Miami in January and Houston in February.
On Miami – Its been the “Next Big” tech/finance hub for decades. Never quite happened. Seems like Miami has a problem with attracting the half retired types.
Politics in America are strange. Either side can basically claim their “Winning”. The left on the popular vote. The right on various issues and the Senate and a lot of Governors/State Houses, and the right on which stays are sucking up population.
The left has a serious problem in that where they’ve governed they sold their cities out to the unions and the pensions which isn’t their core ideology. And those cities are turning into a mess. Chicago you have to leave because you simply can’t own property their since you know 200 billion in pension debt will eventually turn into property taxes. Its like a second mortgage bigger than your first that you never retire.
andrew
Dec 30 2020 at 4:38am
Although there are clear economic benefits to the four states with no personal income tax, it is also important to note that they have more regressive tax structures.
It would be interesting to see a study on the benefits (more jobs, more vibrant economies) versus the costs (greater reliance on middle and low income taxpayers through the general sales tax, the sales tax on electricity consumption, and the tax on gasoline) of not having a personal income tax).
Whether middle and low income taxpayers should pay a greater share of state tax revenues is a value judgment for which there is no right answer. And maybe a better jobs market makes the tradeoff worth it in the no income tax states.
It would nonetheless be good to know more about what is going on. As always, there is no free lunch.
Sgt Dad
Jan 9 2021 at 12:31pm
These are good points and are often made here in WA in support of an income tax. Everybody knows, however, that sales, property, and excise taxes will not go away if an income tax is adopted. So, as “regressive” as it may seem it is much better than the actual alternative.
Sgt Dad
Jan 9 2021 at 12:28pm
Just so’s y’all know, Guv Inslee in WA is fixin’’ to adopt an income tax. Theoretically, an income tax would violate the state constitution. Theoretically. Inslee has the WA supreme court in the bag.
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