About 3% of families move to other states each year in search of a better climate, lower cost of living, and other benefits. The rise of remote work gives people more flexibility in where to be. At the same time, more than 3 million people turn 65 every year and many are looking for attractive places to retire.
How Can States Attract Interstate Movers? IRS data suggest tax burdens are a reason for migration. Of the 25 states with the lowest taxes, 20 had net immigration from other states in 2020.
Top earners may be particularly sensitive to state tax differences. Elon Musk apparently saved half a billion dollars by moving from California, with its top 13.3% tax rate, to Texas, with its zero tax rate. Numerous financial leaders such as Carl Icahn have fled New York City and its top 14.8% tax rate and settled in Florida with its zero rate.
The IRS data backs up the news of top earners moving to low-tax states. For households earning more than $200,000, California loses two households for every gain and New York loses three households for every gain.
On the other hand, Florida gains more than two top-earning households for every one it loses. Eight of the nine states that have no income taxes enjoy net immigration of top earners.
Why should state politics worry about it when top earners move out?
First, states lose a lot of income when top earners leave. The IRS data shows that households with incomes greater than $200,000 accounted for 7% of interstate moves in 2020, but accounted for 41% of the income of all moves.
Top earners also generate a lot of government tax revenue. In California, the top 1% of income tax pays nearly half of all state income taxes. California tries to boost revenue with high taxes for top earners, but if they move out of the state, it loses all the income, sales and property taxes they would have paid.
In addition, entrepreneurs often bring their businesses and related jobs with them when they move. In Florida, West Palm Beach has a booming financial industry fueled by relocated New York-area entrepreneurs. Meanwhile, Musk is expanding Tesla and SpaceX in his new home of Texas.
The wealthy often make large donations to charities in their own states, and those funds stay with the donor. Musk has relocated his charitable foundation to Texas, which could affect the foundation’s donations to projects in that state.
After all, many top earners are angels and venture investors in startup companies. These investors provide entrepreneurs with guidance and oversight, so they tend to invest close to where they live. If a state loses top earners, it can also lose funding for startups.
Policymakers are becoming aware of the new realities of intergovernmental tax competition. By my count, more than 20 states have cut their income tax rates in the last two years alone. The natural environment gives states like Florida an advantage when it comes to attracting residents, but northern states like New Hampshire and South Dakota have also generated consistent immigration with their low-tax policies.
Some analysts fear a “race to the bottom” as states compete for tax cuts. But states like Florida have maintained their low taxes by running their governments efficiently. New York and Florida have roughly the same population, but the latter provides its state and local services with 26% fewer government employees than the former.
People will move on. State politicians should rise to the challenge by leading lean governments, reducing tax burdens and lowering income tax rates.
Chris Edwards is the Kilts family chair of tax studies at the Cato Institute and the author of the forthcoming book Fiscal policy report card on America’s governors.
