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Why Higher Taxes Don't Cause People to Move

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Why Higher Taxes Don't Cause People to Move

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After Illinois raised its income and business taxes last year, Wisconsin Gov. Scott Walker and Indiana Gov. Mitch Daniels visited Chicago, looking to lure residents and businesses to their states. Walker even waved an “Escape to Wisconsin” bumper sticker. Do such appeals work?

Probably not, according to a study by the Center on Budget and Policy Priorities, which found that, especially among individuals, “Tax Flight Is A Myth.”

“The effects of tax increases on migration are, at most, small,” the report said — “so small that states that raise income taxes on the most affluent households can be assured of a substantial net gain in revenue.”

Americans are not that mobile to begin with. Only 1.7 percent change states each year, and only 30 percent ever leave their native state. When people move, it’s because of “new jobs, cheaper housing, or a better climate.”

The report looked specifically at New Jersey, which in 2004 raised taxes on residents earning more than $500,000.

while the net out-migration rate of this income group accelerated after the tax increase went into effect, so did the net out-migration rate of filers with incomes between $200,000 and $500,000, and by virtually the same amount. At most, the authors estimated, 70 tax filers earning more than $500,000 might have left New Jersey between 2004 and 2007 because of the tax increase, costing the state an estimated $16.4 million in tax revenue. The revenue gain from the tax increase over those years was an estimated $3.77 billion, meaning that out-migration — if there was any at all — reduced the estimated revenue gain from the tax increase by a mere 0.4 percent.

Finally, low tax states may be less attractive to migrants, because they don’t fund “cultural facilities, recreational opportunities, and good public services.”

We should point out that Indiana’s income tax rate is 3.4 percent and its sales tax is 7 percent, while Wisconsin’s income tax is anywhere from 4.6 to 7.75 percent, while its sales tax is 5 percent. If you earn $50,000 a year, any money you save in taxes will be wiped out by moving costs. So stay in Illinois.   

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