New Evidence from Academic Research
Do taxes affect individuals’ decisions regarding where to live and work? Can high taxes cause the outmigration of wealthy individuals? If so, why should national and state governments care about that? Academics and policy experts have long studied these questions in various institutional contexts, ranging from local governments in a small federal country to the entire globe.
The consensus in the academic literature is that high-income individuals are very sensitive to taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
increases, both internationally and within countries. The behavioral responses of top earners are particularly important since they generate a significant share of both federal and state tax revenues. For instance, in tax year 2021, taxpayers with adjusted gross income of $200,000 or above (a mere 7 percent of tax returns) generated $1.5 trillion in federal income tax payments, constituting 68 percent of total federal income tax collections, according to the most recent IRS data. Taxpayers with adjusted gross income of $1 million or above (0.5 percent of tax returns) paid $824 billion, 37 percent of total federal income tax receipts.
Not all states provide similar statistics at the subnational level, but one study discussed below presents comparable numbers for California: taxpayers with taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.
of $1 million or above contribute about 40 percent of state income tax receipts.
As the issue becomes more salient in an increasingly mobile economy, it has attracted greater attention from the academic community. In its first issue of 2024, the American Economic Journal: Economic Policy published three academic articles addressing a complex relationship between state taxes and individual decisions on where to live and work in the United States. What can we learn from these articles?
“State Taxation of Nonresident Income and the Location of Work,” by David Agrawal and Kenneth Tester uses an original setting to study tax policy: a golf course. The authors observe that professional golfers, like some other athletes, choose which tournaments to play each year and can be subject to nonresident income taxes in multiple states. Nonresident taxation is nontrivial both from a revenue perspective (nonresidents generate up to 7 percent of total individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.
collections) and from a behavioral standpoint (by choosing not to work in a given state, nonresidents may lower their tax burden). Additionally, it is typically much easier for high-income individuals to change their place of work than their place of residence.
Leaving aside theoretical considerations regarding taxable and mobility elasticities, the paper’s most important finding is that major state income tax increases (meaning income tax rate increases of 1 percentage point and above) significantly reduce participation in golf tournaments in the affected states, particularly among the highest-earning golfers. Thus, nonresidents who have the opportunity to work in multiple states can and do “vote with their feet,” often deciding not to enter self-employment contracts in states with increasing income tax rates. That this is true of professional golfers, who only have a limited number of tournaments to enter (even if the amount at stake is quite high), may indicate an even greater impact for those who have a wider range of employment options.
The second article, “Behavioral Responses to State Income Taxation of High Earners: Evidence from California,” by Joshua Rauh and Ryan Shyu, focuses on California’s Proposition 30, which significantly increased marginal tax rates for high-earning individuals in the state in 2012. The authors use administrative microdata and modern methods of causal analysis to demonstrate that high earners were indeed very sensitive to Proposition 30. In response to the 3-percentage-point increase in the top marginal state income tax rate, which reached 13.3 percent in 2012, high earners reported $321,000-$436,000 less in taxable income during 2012-2014—about 10 percent of their baseline income of $4.15 million. The likely reasons were the reduction in labor supply, shifting income-generating activities to other countries, or other forms of tax avoidance. Rauh and Shyu also discuss the implications of the SALT cap deduction introduced as part of the Tax Cuts and Jobs Act, arguing that this cap increased the incentives for high-income individuals to consider moving to lower-tax states even more than Proposition 30 did.
In “The Introduction of the Income Tax, Fiscal Capacity, and Migration: Evidence from US States,” Traviss Cassidy, Mark Dincecco, and Ugo Antonio Troiano use a historic panel dataset on U.S. states from 1900 to 2010 to demonstrate that the introduction of the state income tax led to significant outmigration of middle- and high-income individuals. The authors differentiate between pre- and post-World War II periods and show that “late adopters” (states that introduced the income tax after 1945) experienced lower revenue growth and higher outmigration rates than “early adopters.” Increased mobility, better transport infrastructure, and lower personal exemptions (compared to the pre-war era) were some of the reasons people found moving to be a reasonable response to new taxes.
One of the most striking findings in the paper is that states that introduced the income tax in the post-war period lost more than 16 percent of their population within 20 to 30 years after the reform. In other words, outmigration in the long run outweighed fiscal capacity gains when new state income taxes were introduced. The implication of this study is clear: when considering new sources of revenue, lawmakers need to think beyond the short-term logic of taxation and account for the long-term implications of increased tax burdens, especially in an increasingly mobile economy.
Descriptively, it has become evident in the post-pandemic years that taxes induce outmigration from high-tax states (see our recent analyses here and here). However, correlation does not imply causation, and there may be other reasons for relocation (weather, being closer to relatives, and job opportunities). Importantly, recent evidence from the academic literature suggests that the link between state income taxes and decisions regarding where to live and work may indeed be strong. Taxes do affect migration and nonresident labor supply, factors policymakers need to consider when implementing tax changes.
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