Connect the dots
By Scott Sumner
In recent months, a number of important firms have announced they are relocating from California to Texas. An article by Peter Yared discussing this trend had a graphic that caught my eye:
The movement of these industries is toward three states that have one thing in common—no state income tax. And these are the only three states with no income tax in the southeastern quadrant of the US—say Texas to Florida and south of the Ohio River.
Progressives often discount the supply side effects of tax changes, pointing to examples such as Kansas where tax cuts had little effect. But Kansas lacks the sort of big cities that would typically draw these firms and its tax cuts were relatively modest. If you are looking for a low tax state on the Great Plains, South Dakota has no state income tax at all. The top rate in Kansas (5.7%) is higher than in Massachusetts (5.0%). That won’t get the job done.
Miami clearly benefits from a mild climate, but Tennessee and Texas have climates that are only average for a southern state.
I’m certainly not a rabid supply sider who thinks that tax rates are all important. But a person would have to be pretty blind to ignore the migration of firms from places like New York, New Jersey and California, to lower tax places.
Interestingly, Washington State has no income tax, which is unique for a northern state with a big city. Washington is also home to the two of the three richest people on the planet (the other–Elon Musk–just announced he’s moving from California to Texas.) Beyond these anecdotes, Washington is also experiencing rapid population growth, which is also unique for a northern state with a big city. Indeed it’s growing even faster than Oregon, which has a slightly nicer climate.
There’s no doubt that climate has been reshaping America in the decades since air conditioning was invented, with people moving to warmer locations. But for the first time ever (AFAIK), California saw its population fall last year, and yet it has a delightful climate (even with the recent forest fires.) High tax Hawaii also lost population.
So while people are gradually moving to warmer locations, state tax policies explain why certain states attract a disproportionate share of the migrants. Indeed, last year more that half of the US population growth occurred in just two states—Texas and Florida. I believe that’s the first time that has ever happened. Add in Tennessee and Washington and you are at nearly two thirds of the nation’s population growth. Recent limits on the deductibility of state and local taxes has exacerbated this trend.
PS. Technically, Tennessee has no wage tax. However, they do tax interest and dividends at 1%. But even that small tax is being phased out at the end of this year.
PPS. Yes, housing policies are another big factor in migration—especially for the middle class.
Happy Holidays everyone!