by James A. Bacon
It’s one of the most contentious issues in state-level tax policy: To what extent are higher taxes self defeating? Do higher taxes drive people into other states and, thereby, undermine the tax base and defeat the purpose of higher taxes in the first place? Throughout my Bacon’s Rebellion commentary, I have always contended that taxes are one factor — a significant one — that influence peoples’ decisions where to live.
Now comes a thoughtful, if not entirely convincing, study from the Center for Budget and Policies Priorities that suggests otherwise. The authors of “Tax Flight Is a Myth: Higher State Taxes Bring More Revenue, Not More Migration,” argue that the effects of tax flight are so small that state governments can raise taxes and be assured of a substantial gain in revenue.
The study makes a number of points worth considering. First, inter-state migration is not common; only 1.7% of U.S. residents move from state to state in a given year. Second, low taxes can prevent a state from maintaining the kinds of high-quality public services that potential migrants value. And third, migration is more likely to be driven by cheaper housing than higher taxes.
Here’s how I would respond. First, while only 1.7% of U.S. residents move from one state to another in any given year, that movement can add up over time. That figure implies that 17% of U.S. residents undertake an interstate move over the course of the decade. That is enough to affect a state’s tax base. In the short run, a state can raise taxes with impunity. But the consequences can be severe over the longer run.
Second, higher taxes do not necessarily contribute to better public services. Sometimes they do. But sometimes they just support featherbedding and expensive pensions for public employees. Sometimes they underwrite boondoggle public works projects that favor the politically connected. Sometimes they support entitlement programs that make life easier for the poor but do nothing for the people who pay the taxes.
Third, housing prices are a factor influencing where people move. So are average wage levels and the general cost of living. Also, as economic geographer Richard Florida has illuminated, members of the “creative” class (who are desirable from an income and tax-generating viewpoint) are drawn by a metropolitan region’s character — its openness to newcomers, its tolerance for diversity, and its cultural vibrancy and authenticity. To those factors I would dd the role of human settlement patterns: Some regions are more livable than others. Finally, I would hazard a guess that the single-most important factor driving inter-state migration is simply the availability of jobs. If you can’t find work, none of the other factors really matter. Taxes are only one factor in the mix, and it is important not to over-sell them.
But tax levels are correlated with job creation and income growth. (For evidence, click here.) That’s not because they are the critical driving variable, I suspect, but because they are a proxy for a larger mindset, what Walter Russell Mead terms the “blue state governance model” of high taxes, public employee unions and heavy regulation. (For a taste of Meade’s thinking, read “Blue State Schools: Shame of a Nation.”) Overall, the Red State policy mix is better at creating jobs and raising incomes than the Blue State policy mix.
Bacon’s bottom line: Taxes don’t matter as much as some conservative analysts think they do. But they are a proxy for the Red State policy mix that has been proven to be far more robust than the Blue State model.
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