New report shows tax flight is a myth

Gov. Fallin and other state leaders have set a long-term goal to eliminate Oklahoma’s income tax. One reason frequently offered by opponents of the income tax is that it will encourage people and businesses to move to Oklahoma from other states.

A report released today by the Center on Budget and Policy Priorities shows that this argument is wrong. Major findings of the report include:

• Migration between states is rare. Between 2001 and 2010, just 1.7 percent of U.S. residents moved from one state to another per year, and only about 30 percent of Americans change states over their entire lifetime.  The ties of a job, family, and friends keep most people from leaving their community.
• Increasing taxes on high earners can provide a substantial revenue boost for states. An extensive study of New Jersey’s 2004 tax increase on filers with incomes exceeding $500,000 found that migration of this group after the tax increase was no different from that of filers with incomes between $200,000 and $500,000.  The study estimates that at most, 70 tax filers might have left New Jersey between 2004 and 2007 because of the tax increase. This migration cost the state an estimated $16.4 million, but the revenue gain from the tax increase during that same time was about $3.77 billion, a gain that was 235 times greater than the amount lost.
• The migration that does occur is much more likely to be driven by cheaper housing than by lower taxes. The difference in housing costs between states is many times greater than the difference in taxes. The report shows that net migration in Florida and California (which are often cited as examples of states gaining or losing population because of their tax policy) is vastly more affected by changes in housing prices than tax rates.

Below is an illustration prepared by OK Policy showing net household migration to and from Oklahoma between 2004 and 2009 based on IRS tax return data. Overall, Oklahoma had a net gain of 15,226 households due to domestic migration, along with a net gain of 4,362 households from foreign migration. Oklahoma had a net gain of households from 36 states, shown in brown on the map, and a net loss to 13 states, show in blue. Click the image to see an interactive version at ManyEyes:

The illustration shows that Oklahoma gained the most households from California and lost the most to Texas. This can be explained by the sheer size of both states, our proximity to Texas, and historical ties with California with resulting family connections that contribute to migration. Texas also has low housing prices and large urban centers to attract job-seekers.

Looking beyond those two states, there are no clear connections between state tax rates and net migration to or from Oklahoma. For example, Oklahoma gained households from Nevada and New Hampshire, which have some of the lowest average tax rates, as well as Florida, which has no state income tax. In the same period, we saw a small net loss of households to New York and Massachusetts, which have some of the highest state taxes.

Since Oklahoma already has relatively cheap housing and cost of living, the evidence suggests that we have much more to gain by improving public services and infrastructure than by cutting taxes. In other words, it is already inexpensive to live here, so paying a little more in taxes to improve the quality of life would help us achieve the best of both worlds.