Leaving High Taxes and Big Government Behind

This post is based on some very useful references provided in a comment to my prior post on the Cato Institute evaluation of the freedom in the 50 States 2016.

Between 1992 and 2014, the IRS tracked the migration of people and their AGI on their tax forms. The net results of these migrations are indicated in this map where red is a loss of income due to net migration and green is an income gain.

It is interesting to note that of the 8 least free states by the 2016 report of Cato Institute on Freedom in the 50 States of my last post, the following 7 states are either red or light red in this income migration map, indicating a loss of income:

New York
California
New Jersey
Maryland
Connecticut
Illinois
Rhode Island

Out migration from California tends to be strong to Arizona, Nevada, Washington, and Oregon.  All of these states are more free than California and the least free is Oregon, which perhaps explains why its income increased the least of these four states.

New Hampshire, the freest state, had a small increase in income due to migration. Oklahoma and Alaska were #3 and #2, respectively, and both have risen in recent years in freedom, so their newly deserved reputations were not yet established in many of the years 1992 - 2014.  Indiana at #4 has been more stable in its freedom and clearly has performed much better in minimizing losses than its neighboring states of Illinois, Michigan, and Ohio in this time period.  Indiana's weakest ranking of #26 was in fiscal policy which includes taxes and that is a particularly strong factor on the out-migration of income.  Tennessee, Idaho, Florida, and Arizona of the 10 most free states are also all green in this income migration map above.  #5 South Dakota is white, or income neutral, and #9 Iowa is pink.

Overall, the freer states were the Rocky Mountain states, the Great Plain states from Oklahoma north, and the Southeast with the exception of Mississippi, Louisiana, and Arkansas.  There are no red states in these areas.  Nebraska, Iowa, Missouri, and Kansas are pink, but three of these states are in the #16 - #25 grouping for freedom.  Missouri is further hurt by not being a Right to Work state.

Here is another interesting map from Peter J. Nelson of the Center of the American Experiment entitled Minnesotans on the Move to Lower Tax States 2016:

In the map, the bluer the color the greater the loss of taxpayers earning more than $200K a year.  We also find that most of the low freedom states have higher losses than do high freedom states.  All of the 9 states with gains equal or greater than 1.00% are in the top twenty most free states by the Cato Institute ranking.  Tax policy is under the Fiscal Policy ranking and in this area South Carolina is ranked #23, Nevada is #25, and Wyoming is #21, so there is a stronger correlation with the overall freedom ranking than there is with the Fiscal Policy ranking subset of freedoms for these high income in-migration states.  Some of these high in-flux states do have very high Fiscal Policy rankings, however, with New Hampshire, Tennessee, Florida, Montana, and Idaho having Fiscal Policy rankings from #1 to #8.  So general freedom may be more important for a subset of the wealthier migrators and tax policy alone may be the most important factor for another subset of these wealthier migrators.

Overall, I would judge it likely that income migration is affected strongly by tax policy, but it is also affected strongly by a desire for freedom in general.  Different people have different weightings on these aspects of freedom in their personal set of values.  Good government seeks to provide everyone with the freedoms their individual rights entitle them to.  When a state government offers a better service to freedom, rational and productive people will come to that state. Good things happen to states and the local communities when more rational and productive people choose to live there.

What States Are Americans Moving To or Fleeing From?

United Van Lines does an annual assessment of the percentage of households moving to and from each of the states and Washington, DC.  It is the largest mover in the USA.  Overall, the general story of which states are most desirable and which are least desirable for 2014 is told in this map of the USA:

The ten most desirable states with the largest percentage of households moving to them are:

Oregon                       66.4% Inbound
South Carolina           61.4%
North Carolina           60.5%
Vermont                     59.4%
Florida                        58.9%
Nevada                       57.3%
Texas                          57.0%
District of Columbia  57.0%
Oklahoma                  56.8%
Idaho                         55.5%
Colorado                   55.1%

Nebraska, Arizona, California, Georgia, Louisiana, Wyoming, Delaware,  and South Dakota all had slightly more households moving in than moving out in 2014 and are listed in order.  Tennessee had 50.0% moving in and 50.0% moving out.  The rest of the states were losers in 2014.

The worst losers are:

New Jersey               64.9% Outbound
New York                 64.1%
Illinois                      63.4%
North Dakota           60.5%
West Virginia           60.1%
Ohio                         59.0%
Kansas                     58.2%
New Mexico            57.4%
Pennsylvania           56.8%
Connecticut             56.7%
Massachusetts         56.7%
Utah                        56.0%
Virginia                   55.5%
Michigan                 55.4%
Mississippi              55.2%
Kentucky                 55.0%

[Of these states, it should be noted that North Dakota and Utah were among the most stellar states in creating jobs over the entire time span from December 2007 to December 2014.  The loss of jobs in North Dakota in 2014 is likely due to the drop in the price of oil in the later part of that year.  Comment added on 20 Feb 2015.]  The remaining minor losing states are listed from worst to not so bad -- Minnesota, Indiana, Wisconsin, Maine, Maryland, Missouri, Iowa, Montana, Alabama, Arkansas, New Hampshire, and Rhode Island.

It should be noted that the United Van Lines survey is more accurate with respect to established and larger wealth households than with young people who may live with few furnishings in small apartments in major cities, such as Manhattan.

The highest fraction of households moving out for retirement reasons was the Northeast, with more than one out of four moving for retirement.  The highest fraction moving in for retirement was nearly one out of three moves into the Mountain States.

DC remains a popular moving destination due to the growth of the federal government, but the good news is that while from 2008 to 2012 it was number one, in 2013 it fell to #4, and in 2014 it fell further to #7.

With the exception of Delaware and DC, the entire Northeast from Virginia to Maine lost households due to more outbound moves than inbound moves.  The Midwest states from Ohio and West Virginia to Minnesota and Iowa also all lost population.  I believe these areas are being harmed by the anti-growth and anti-business attitudes and governmental policies particularly prevalent in these areas.  They are also harmed by insufficient warming in those areas as more and more people take the opportunity to move to areas with warmer climates.  How odd that federal government policy wishes to maintain colder temperatures in these areas, as do Progressive Elitists, yet most people voting with their feet seek warmer climates.  Apparently, the real catastrophe of warmer climates is that people view them as desirable!

Texas Rewards Success, California Taxes It

California and Texas are 1 and 2 in Gross State Product (GSP), the state equivalent of the GNP. The 2008 GSP of California was $1.847 trillion and that for Texas was $1.224 trillion, with New York not too far behind Texas. From 2005 to 2008, the states with the fastest growth in GSP and their ranking on the personal and economic freedom index of Ruger and Sorens published by the Mercatus Center of George Mason University (dated February 2009) are:

Wyoming, 33.56%, 20
North Dakota, 28.52%, 4
Texas, 24.59%, 7
Utah, 23.17%, 14
Alaska, 21.72%, 47
Louisiana, 21.42%, 28
Oklahoma, 21.14%, 17
Montana, 20.48, 21
South Dakota, 20.34, 1

The corresponding results for California are:

California, 13.40%, 48

An article in the Investor's Business Daily called A Trenchant Tale of Two States points out further contrasts between these two states.  California had lost 1.46 million jobs due to this socialist recession we are in as of August when comparing to the jobs of December 2007.  But, Texas had replaced the jobs that were lost there earlier in the recession.  As of August, California alone accounted for 22.74% of the jobs lost in the nation since December 2007!

The magazine Chief Executive polls CEOs about the business environment in the states and California was ranked 50th of the states each of the last five years.  Texas was ranked #1.  The CEOs blame California's high taxes, its over-regulation, and bias against the profit motive.  On the other hand, Texas is appreciated for not having a personal income tax, not taxing capital gains, and having a more reasonable regulatory burden.  California's capital gains tax is as high as 10.55%.  Its regulations raise labor costs, promote litigation, and put building projects into suspended animation.  The state and local governments make a habit of preying on businesses and property owners with fees and mandates.

As the IBD article graphics above show, Texas over a ten-year period, had a lower personal tax burden, its gross state product growth was higher, personal income growth was higher, its population growth was much higher, and its non-farm payroll employment growth was much higher when compared to California.  Texas also bettered the national averages in all of these categories.  In addition, there was a strong net domestic migration out of California and a strong migration into Texas.  People vote with their feet.

The issue of a state personal income tax is worth looking at more closely.  Texas and the eight other states with no state personal income tax grew their nonfarm payroll by 11.76% from 1999 to 2009.  California and the other eight states with the highest upper personal income tax brackets, grew the nonfarm payroll by only 2.48%.

Some states, such as California, are very highly biased against the profit motive, business, and property owners.  It makes doing business in those states very unpleasant.  Some companies move out of the state, while others simply choose to do their future expansion in other areas.  Sometimes the other area is Texas and sometimes it is in another country.

The IBD article concludes with an interesting anecdote:  California governments love alternative energy.  The City Manager of Brisbane, CA pretends to be enthusiastic about solar power, but this does not stop him from charging $13,510 for a permit to install a 131 kilowatt system.  He claimed it made no sense to allow a commercial firm a break on that fee, since they only wanted a profit.  The bias against profit might as well be a bias against jobs and income growth.  This bias is a characteristic of the more socialist states such as California and they pay a steep price for that bias.

Comments on California's Plight

We have heard a great deal about California's budget and revenue problems at the state government level recently. Government spending is clearly out of control. But there are other problems as well. The 29 August - 4 September issue of the Economist, notes that

Byzantine regulations, high and complex taxes and legislative gridlock are driving out businesses, while high personal taxes are driving out the rich and a disintegrating social safety net is pushing away the poor.

The Milken Institute reports that California is losing its manufacturing industries to such states as Arizona, Nevada, Indiana, Kansas, Minnesota, Oregon, Texas, and Washington. It says that California would have had to create another 1.2 million jobs between 2000 and 2007 than it did to have maintained its population relative to that of the rest of the United States. Total migration to California has been positive since 1996 due to foreign immigrants, but the state has a net outward migration of U.S. citizens.

The biggest single reason for this is housing affordability, but housing costs are so high because the same socialist/environmentalist cabal that is causing California's other problems is causing the limited land available for housing to rise in cost to unholy heights. The poorer citizens are the most likely to leave the state. 1.73 households paying little in taxes are leaving for each such new low income household entering the state. Among the richest state citizens, 1.09 households are leaving for each household arriving.

Is the real socialist/environmentalist aim to cause the poor to leave your state and move to another state? Environmentalists do seem to be very fond of wishing for population reduction! If so, they are apparently succeeding in California.

Economic Freedom and the Presidential Election

The Pacific Research Institute in association with Forbes produced the U.S. Economic Freedom Index, 2008 Report by Lawrence J. McQuillan, Michael T. Maloney, Eric Daniels, and Brent M. Eastwood and I have been intending to discuss it for some time. Then I thought that it might be interesting to correlate it with the results of the presidential election, which can now be done.

The report says, "Economic freedom is the right of individuals to pursue their interests through voluntary exchange of private property under a rule of law. This freedom forms the foundation of market economies. Subject to a minimal level of government to provide safety and a stable legal foundation, legislative or judicial acts that inhibit this right reduce economic freedom."

They set up 35 indices including such factors as tax rates, state spending, occupational licensing, environmental regulations, income redistribution, right-to-work and prevailing-wage laws, tort reform, and many others. They then assumed that people want to be free, so they search out locations, governments, and situations where freedom reigns. So they made migration their metric for deciding which index among the 35 they had set up as possible good indicators of economic freedom they would use to rank the states for economic freedom.

The formula for the Index is: Index = (0.2313 x Fiscal Score) + (0.2159 x Regulatory Score) + (0.1894 x Judicial Score) + (0.1208 x Government Score) + (0.2426 x Welfare-Spending Score)

The net migration score for the 20 freest states was 27.36 people per thousand. For the 20 most economically oppressed states the net migration score was 1.17 per thousand. For every one place improvement in state rank, a state's net migration per 1,000 people typically increased about one person.

The results of this economic freedom study are given below with the presidential popular vote result for each state, as State, Economic Freedom Score, 2008 Rank, 2004 Rank, 1999 Rank, McCain Vote %, Obama Vote %.

South Dakota, 14.54, 1, 15, 5, 53%, 45%
Idaho, 14.81, 2, 4, 1, 61%, 36%
Colorado, 14.91, 2, 14, 45%, 53%
Utah, 15.16, 4, 5, 3, 63%, 34%
Wyoming, 15.39, 5, 9, 4, 65%, 33%
Nevada, 15.70, 6, 12, 20, 43%, 55%
Oklahoma, 16.74, 7, 6, 18, 66%, 34%
New Hampshire, 17.07, 8, 7, 6, 45%, 55%
Virginia, 17.07, 9, 3, 2, 47%, 52%
Kansas, 18.06, 10, 1, 10, 57%, 41%
Georgia, 18.22, 11, 19, 12, 53%, 46%
North Dakota, 18.56, 12, 18, 21, 53%, 45%
Montana, 18.56, 13, 21, 26, 50%, 47%
Arkansas, 18.82, 14, 23, 15, 59%, 39%
Missouri, 18.90, 15, 10, 13, 50%, 49%
Alabama, 19.03, 16, 25, 11, 61%, 39%
South Carolina, 19.08, 17, 13, 16, 54%, 45%
Wisconsin, 19.15, 18, 38, 37, 43%, 56%
Mississippi, 19.28, 19, 28, 9, 57%, 43%
Delaware, 19.61, 20, 8, 7, 37%, 62%
Arizona, 19.78, 21, 11, 25, 54%, 45%
Iowa, 19.88, 22, 16, 24, 45%, 54%
Indiana, 19.92, 23, 14, 22, 49%, 50%
Hawaii, 19.92, 24, 35, 39, 27%, 72%
Nebraska, 19.93, 25, 20, 23, 57%, 41%
Minnesota, 20.92, 26, 44, 43, 44%, 54%
Illinois, 21.16, 27, 46, 36, 37%, 62%
Florida, 21.16, 28, 22, 30, 49%, 51%
Tennessee, 21.18, 29, 26, 19, 57%, 42%
Oregon, 21.24, 30, 29, 41, 42%, 56%
Texas, 21.32, 31, 17, 8, 55%, 44%
Lousiana, 21.36, 32, 40, 31, 59%, 40%
Massachussetts, 21.72, 33, 41, 47, 36%, 62%
Maryland, 21.73, 34, 27, 35, 38%, 61%
Maine, 21.81, 35, 30, 42, 41%, 58%
North Carolina, 21.87, 36, 24, 17, 49%, 50%
Washington, 21.92, 37, 31, 40, 41%, 58%
West Virginia, 22.55, 38, 32, 32, 56%, 43%
Connecticut, 22.66, 39, 48, 46, 39%, 60%
Kentucky, 22.71, 40, 39, 29, 58%, 41%
New Mexico, 22.82, 41, 37, 28, 42%, 57%
Vermont, 22.87, 42, 36, 34, 32%, 67%
Michigan, 23.08, 43, 34, 27, 41%, 57%
Ohio, 23.34, 44, 43, 33, 47%, 51%
Alaska, 23.38, 45, 33, 38, 62%, 36%
Pennsylvania, 23.88, 46, 45, 45, 44%, 55%
California, 23.89, 47, 49, 44, 37%, 61%
New Jersey, 23.94, 48, 42, 48, 42%, 57%
Rhode Island, 24.18, 49, 47, 49, 35%, 63%
New York, 27.39, 50, 50, 50, 37%, 62%

Of the top 25 freest states by economic freedom ranking, McCain won 16 of the states. In the most oppressed 25 states, he won only 6 states. The voters who consistently pursue restrictions upon our individual economic freedoms, were fairly consistent in choosing the socialist Obama. Of the six states that gave McCain 61% or more of the vote, five were ranked in the top 16 by economic freedom index and four were ranked in the top 7 by economic freedom. The other state was Alaska, whose people think of themselves as being self-reliant and independent, but who are massively on welfare. It will be interesting to see if those states voting for Obama tumble in future economic freedom rankings.

The states of Idaho, Utah, Wyoming, New Hampshire, and Virginia have consistently had top ten rankings in all of the three evaluations in 1999, 2004, and 2008. Until this election, all of these states had voted Republican in the last several presidential elections. Now that New Hampshire and Virginia have defected to the socialist candidate, I expect to see them fall out of the top 10. Indeed, they are barely hanging in there now, both having lost position steadily since 1999. There are other states whose economic freedom ranking has steadily fallen also: Ohio, Michigan, Vermont, New Mexico, Kentucky, North Carolina, Texas, Tennessee, and Delaware, where I have ordered them from most oppressive to least oppressive. Of the 11 falling states, 8 are already ranked 29 or worse.

There are a few steadily improving states as well. These are Nevada, North Dakota, Montana, and Hawaii. Then there is one state which has been remarkably consistent: New York. It has ranked dead last as the most oppressive state of all in each of the last three evaluations. Most of us will realize that this means it is ranked #50, but for Mr. Obama's sake, I will point out that the last rank is not 57. 57 is the number of Heinz varities, Mr. Obama.

South Dakota at number 1 has no corporate income tax, no personal income tax, no personal property tax, no business inventory tax, and no inheritance tax. Companies are moving into the state. In 2007, the Small Business Survival Foundation ranked South Dakota the best business climate for entrepreneurs. Forbes magazine says Sioux Falls is the best smaller metro area for business and careers. The Milken Institute says it has a low cost of doing business.

The freest states are in the Great Plains and the Rocky Mountain states, while the most oppressed are in the Northeast. South Dakota, North Dakota, Minnesota, Wisconsin, and Illinois have all made major improvements in economic freedom in the Upper Midwest. But, Indiana has fallen somewhat and Michigan and Ohio are both very bad and falling. The fact that Indiana and Ohio have fallen may say a lot about why they voted for Obama and these states may be hard for the Republicans to win in the future given their poor attitude toward economic freedom.

The states with the biggest drops were Texas, Alaska, Delaware, North Carolina, and Arizona. Again, these rapid drops may be a harbinger of future defections to the socialist Democrats of Texas and Arizona and the continued loss of North Carolina.

Among those states having values which have given rise to more economic freedom, the Republicans should find states it will be particularly beneficial to try to swing into the Republican column before the next election. Among these states are Colorado, Nevada, New Hampshire, Virginia, Wisconsin, Delaware, Iowa, Indiana, Minnesota, Illinois, and Florida. OK, maybe Illinois will have to wait until they do not have a socialist Native Son in the presidency. A determined and consistent effort in these states might well provide a big payoff in the next election or two. Meanwhile, the Republicans should make a strong effort to improve the economic liberty of Texas and Arizona, so they will not lose them in the future. They should do the same in North Carolina in an effort to recover it.