About 3% of families move to different states each year in search of nicer climates, lower living costs, and other advantages. The rise of remote working is giving people more flexibility on where to locate. At the same time, more than 3 million people reach the age of 65 each year, and many are looking for attractive places to retire.
How can states attract interstate movers? IRS
data
suggest that tax burdens are one driver of migration. Of the 25 lowest-tax states, 20 enjoyed net in-migration from other states in 2020.
Top earners may be particularly responsive to interstate tax differences. Elon Musk
apparently saved
half a billion dollars when he moved from California, with its 13.3% top income tax rate, to
Texas,
with its zero rate. Numerous leaders in finance, such as
Carl Icahn
, have escaped from New York City and its 14.8% top income tax rate and settled in
Florida,
with its zero rate.
The IRS data confirm the news stories about top earners moving to low-tax states. For households with incomes above $200,000, California is losing two households for each one it gains, and New York is losing three households for each one it gains.
On the flip side, Florida is gaining more than two top-earning households for each it loses. Eight of the nine states that do not have income taxes enjoy net in-migration of top earners.
Why should state policymakers care if top earners move out?
First, states lose a lot of income when top earners leave. The IRS data show that households earning more than $200,000 were 7% of interstate movers in 2020 but accounted for 41% of all movers’ income.
Top earners also generate a lot of
state tax
revenue. In California, the top 1% of earners pay
almost half
of all state income taxes. California tries to raise revenue with high taxes on top earners, but when they move out of the state, it loses all the income, sales, and property taxes they would have paid.
Further, entrepreneurs often bring their businesses and related jobs with them when they move. In Florida, West Palm Beach has a
booming finance industry
fueled by transplanted New York-area entrepreneurs. Meanwhile, Musk is expanding Tesla and SpaceX in his new home of Texas.
The wealthy often make large contributions to charities in their own states, and those funds leave with the donor. Musk has moved
his charitable foundation
with him to Texas, which
may
tilt the foundation’s giving to projects in that state.
Finally, many top earners are angel and venture investors in startup companies. These investors provide guidance and oversight to entrepreneurs, and so they usually invest close to home. If a state loses top earners, it may also lose funding for startups.
Policymakers are waking up to the new realities of interstate tax competition. By my count, more than 20 states have cut their income tax rates in just the past two years. The natural environment gives states such as Florida an edge in attracting residents, but northern states such as New Hampshire and South Dakota have also generated consistent in-migration with their low-tax policies.
Some analysts worry about a “race to the bottom” as states compete to cut taxes. But states such as Florida have maintained their low taxes by operating their governments efficiently. New York and Florida have about the same population, but the latter provides its state and local services with
26% fewer
government employees than the former.
People are going to keep on moving. State policymakers should embrace the challenge by running lean governments, restraining tax burdens, and cutting income tax rates.
Chris Edwards is the Kilts family chair in fiscal studies at the Cato Institute and the author of the forthcoming Fiscal Policy Report Card on America’s Governors.
