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Why Money Doesn’t Walk

October 20, 2014 at 11:24 AM

We’ve shown that interstate differences in tax levels have little effect on whether and where people move, contrary to claims by some tax-cut proponents.  The related claim — that people who leave a state take their incomes with them, harming that state’s economy — isn’t true either, our new paper explains.

The vast majority of people can’t take their income with them to a new state because they work for someone else.  When people leave a state, they usually also leave their job.  The income they made in that job then typically goes to the person who gets that job next; it doesn’t leave the state.

For example, consider a California sales representative who is transferred to Nevada.  What you might call “income migration” (or “money walks”) analyses would suggest that California’s economy is weakened because the sales representative moved away and took her income with her.  In reality, her income stayed with her employer and was then transferred to her replacement.  California’s economy was not harmed.

Income migration analyses also ignore the income gains for other in-state small businesses when business owners move away.  For example, if a New York doctor in private practice retires and moves to Florida, his or her patients ― and their payments ― will go to some other New York provider, increasing that provider’s income.  Also, the owner of a successful business who leaves will often sell it to someone who will continue to operate it.

Moreover, income migration analyses effectively assume that people’s incomes stay the same after they leave a state, even if they don’t find a job in the new location or moved there to retire.  That assumption further skews their results.  For example, when someone from New Jersey retires to Florida, income migration analyses claim that New Jersey’s economy lost income equal to the person’s pre-retirement salary, even though that person’s income probably would have declined even if he or she had stayed in New Jersey.

To be sure, some income does automatically follow a person when he or she leaves a state — pensions, Social Security, and investment earnings, for example.  But that represents a relatively small share of total taxable income — under one-fifth in most states.  And, as with other forms of income, much of such income that is “lost” to a state when people move out is replaced by income “gained” when others move in.

Policymakers should focus their attention on the policy choices most likely to grow the incomes of their current and future residents, and not be distracted by misleading claims about income migration.  The chief policy prescription that the income migration concept is used to justify — deep cuts in (or outright repeal of) state income taxes — would likely prove self-defeating, leading to deteriorating schools, roads, public safety, and other services that make states places where businesses want to invest and where the engineers, managers, and other personnel they need to hire want to live.


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