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Taxes and Interstate Migration

This study examines the relationship between taxes and interstate migration in New Jersey. Findings suggest that higher taxes have led to outmigration, resulting in a loss of taxpayers and income for the state. The study also explores the effects of housing prices on migration patterns.

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Taxes and Interstate Migration

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  1. Taxes and Interstate Migration New Jersey Department of the Treasury Office of the Chief Economist Office of Revenue and Economic Analysis

  2. The New Jersey Tax Flight Controversy • In 2004 New Jersey sharply increased its highest tax rates: • Marginal rate on income over $500,000 was boosted from 6.37% to 8.97%. • Hughes and Seneca (2007) first documented increased outmigration from New Jersey. • Havens (2010) documented large unfavorable shift in wealth movements from New Jersey than from neighboring states. • Young and Varner (2011) document outmigration rise at upper end, but • Regard loss of tax base as very small relative to revenue gain • Argue that tax increase had little or nothing to do with outmigration • Assert high home prices in New Jersey may have spurred outmigration of the well-to-do.

  3. Net Migration from New Jersey

  4. Taking another look at the issue • Young and Varner • Only considered taxes and outmigration, not taxes and inmigration (did not consider individuals who did not move to New Jersey as a result of the tax change) • Only looked at New Jersey • Assumed that 2004 tax hike had no implications on migration patterns of individuals not immediately affected. • Essentially looked at direct effect on individualmigration decisions, and did not take into account expectational and other indirect effects on the rest of the population. • Did not systematically look at the influence of housing costs

  5. Study of Interstate Migration • Started with the IRS migration dataset. • This series presents annual state-to-state movements of taxpayers and adjusted gross income. • Assumed migrations are influenced by • Differences in unemployment rates (people likely move from high-unemployment rate to low-unemployment rate states) • Differences in home prices (people likely move from high-home price to low home-price states) • Differences in state income taxes (people likely move from high-tax to low-tax states, especially to those with no state income tax)

  6. Results • Statistically significant effects of income tax rate differentials on annual migration. • Housing price differentials also significant. • People and income are attracted to zero income-tax states. • Hard to distinguish from tax differential effect.

  7. Implication of Results for New Jersey • Suppose NJ boosted its income tax schedule by one percentage point across the board (and no other state changes its taxes). • This would be a very large tax hike • More than twice as big as the 2004 increase. • Static revenue increase would be nearly $2 ½ billion a year. • One model (without zero tax attractor or state fixed effects) suggests NJ would see increased annual net outflows of • About 4,200 taxpayers (likely about twice as many persons) • About $530 million in AGI • Average income of affected taxpayers equal to about $125,000. • Suggests higher-income taxpayers are most sensitive to changes associated with tax increase. • Model with state fixed effects has comparable income loss, but higher loss of taxpayers. • Similar calculations can be made for any other state.

  8. Calculated Effects of 2004 “Millionaires’ tax” • If NJ effective rates had remained at 2003 levels (movement since reflects bracket creep as well as changes in the law), then by 2009 • NJ would have had roughly 20,000 more taxpayers. • Adjusted gross income would be approximately $2.4 billion higher, generating more than $125 million in state income tax. • Suggests that revenue boost from 2004 increase has been partly reversed by induced out-migration of the base (as well as lessened in-migration).

  9. Some Limitations of the Results • Model does not estimate migration effects on • Business tax revenue • Property tax revenue • Sales tax revenue • The cumulative tax losses to the state could potentially be larger than the model’s predictions • Result not necessarily causal • A weak state economy could spur both outmigration and tax increases. • State fixed effects, unemployment rate would help control for this. • Still suggests that widened tax differential is at least a symptom to be concerned with.

  10. Effect of House Prices • A $10,000 increase in New Jersey home prices would be associated with a loss of 1200 taxpayers a year and $66 million in adjusted gross income. • Average income of lost taxpayers is in one specification smaller than those affected by a rate increase (about $50,000 a year vs. about $125,000 a year).

  11. Preliminary Follow-Up Results • Estimation of model for New Jersey alone shows • Very similar tax effects as that derived from national model. • Stronger home price effects. • Little evidence for effect of longer lags on tax differential. • Suggests that the effect works through the level of interstate differential, not its change. • Suggests that the effect does not materially grow or fade over time.

  12. Additional Comments • IRS data does not allow separation of “high-income” and “low-income” taxpayers. • Perhaps county migration data can help capture those effects. • In any event, effects of tax changes on migration can permeate throughout population. • Effect of top marginal rate (purer policy variable) is similar to that of weighted-average marginal rate.

  13. Survey Evidence • In July 2011 subscribers to the NJ Division of Taxation’s Tax E-Notes were asked about migration patterns. • Most likely, these are accountants or other financial advisers. • Approximately 200 responded. • More than half said that clients had recently left, or expressed interest in leaving the state. • Given the option to pick 5 out of a list of 11 potential reasons for outmigration, the top ones were • State income taxes (85.4%) • State property taxes (77.7%) • State estate taxes (67.0%) • Retirement (47.6%) • Housing costs (43.7%)

  14. Survey Question

  15. Conclusions • Analysis of IRS data suggests some connection between interstate tax differentials and migration patterns. • High taxes seem to be associated with loss of higher-income taxpayers. • High home prices seem to be associated with loss of middle-income taxpayers. • Application to New Jersey suggests cumulative outmigration may have offset some portion of the 2004 tax increase. • Given New York’s 2012 reduction in income taxes, sensible to be aware of the potential impact of New Jersey taxes on migration. • Survey responses suggest that New Jersey’s taxes may be on many people’s minds when making location decisions.

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