There's a Direct Link Between Migration and Income Taxes, Study Finds

Despite an overall population growth of 0.49 percent, interstate migration emerges as the primary driver of net population changes at the state level, according to reports. Delving deeper into this phenomenon, a study spanning more than a century of income tax history unveils a compelling narrative: Americans have gravitated toward lower or no-income tax states since the inception of income taxes in 1913. Titled "The Introduction of the Income Tax, Fiscal Capacity, and Migration: Evidence from U.S. States," this pioneering research is co-authored by Ugo Antonio Troiano, economist and associate professor at the University of California.

The study marks the first systematic analysis of state income tax implementation in the United States and explores the ramifications of taxpayer migration to lower-tax jurisdictions.

Examining state-level tax policies from 1900 to 2010, the study reveals that states adopting income taxes witnessed a significant increase in revenue per capita, ranging from 12% to 17%. "Personal income tax, initially introduced for wealth redistribution, represents a levy on labor income," explains Troiano, whose expertise encompasses politics and economics.

"The underlying intention was to furnish services to underprivileged segments of the population and mitigate income inequality," he added. However, the research also highlights a persistent trend: escalating taxes have spurred affluent Americans to seek residence in jurisdictions with lower tax burdens.

This phenomenon underscores the delicate balance between taxation and taxpayer mobility. Despite the significance of income taxes for state governments, several states have opted to eschew income taxes entirely, including Texas, Florida, Nevada, Washington State, Wyoming, and South Dakota.

The study traces legislative battles over income tax implementation, highlighting instances where states either repealed or deferred income tax legislation due to public or political resistance. Moreover, it reveals the pivotal role of interstate migration in shaping tax revenue, economic output, and overall economic growth trajectories.

Furthermore, the 2023 IRS migration data found a prevailing inclination among Americans to relocate to states offering favorable tax structures. Notably, states with below-median state and local tax collections per capita tend to attract strong inbound migration, suggesting a positive correlation between tax policy and population movement.

The impact of interstate migration on states' fiscal landscapes has become increasingly apparent in recent migration patterns. Between 2020 and 2021, post-pandemic dynamics precipitated a large redistribution of taxpayers across state lines, resulting in both gains and losses for various states.

New York, in particular, experienced a significant population outflow, losing 1.1 percent of its population to other states between July 2022 and July 2023, according to the U.S. Census Bureau. Aligning with these trends, data from U-Haul and United Van Lines corroborate a broader narrative of shifting population dynamics and migration patterns.

Troiano emphasized that policymakers must remain cognizant of potential mobility responses in the quest to address income inequality. While implementing measures to reduce income inequality is undoubtedly important, it's imperative to recognize that these actions can elicit various behavioral reactions among taxpayers, particularly those in higher income brackets.

"Raising taxes too much might backfire, as the state might lose too many relatively wealthy contributors," he said.