Do taxes influence where individuals choose to live and work? Can high taxes lead to the outmigration of wealthy individuals? These questions have been the subject of extensive academic and policy research, with the consensus being that high-income individuals are indeed very sensitive to tax increases, both internationally and within countries. This sensitivity is particularly significant given that top earners contribute a substantial share of both federal and state tax revenues.
For instance, in tax year 2021, taxpayers with an adjusted gross income of $200,000 or above, which represents a mere 7 percent of tax returns, generated $1.5 trillion in federal income tax payments. This constituted 68 percent of total federal income tax collections. Similarly, taxpayers with an adjusted gross income of $1 million or above, representing 0.5 percent of tax returns, paid $824 billion, or 37 percent of total federal income tax receipts.
Not all states provide similar statistics at the subnational level, but one study presents comparable numbers for California: taxpayers with taxable income of $1 million or above contribute about 40 percent of state income tax receipts.
As the issue becomes more salient in an increasingly mobile economy, it has attracted greater attention from the academic community. In its first issue of 2024, the American Economic Journal: Economic Policy published three academic articles addressing the complex relationship between state taxes and individual decisions on where to live and work in the United States.
One of these articles, titled “State Taxation of Nonresident Income and the Location of Work,” by David Agrawal and Kenneth Tester, uses an original setting to study tax policy: a golf course. The authors observe that professional golfers, like some other athletes, choose which tournaments to play each year and can be subject to nonresident income taxes in multiple states. Nonresident taxation is nontrivial both from a revenue perspective and from a behavioral standpoint. By choosing not to work in a given state, nonresidents may lower their tax burden. Additionally, it is typically much easier for high-income individuals to change their place of work than their place of residence.
The paper’s most important finding is that major state income tax increases significantly reduce participation in golf tournaments in the affected states, particularly among the highest-earning golfers. Thus, nonresidents who have the opportunity to work in multiple states can and do “vote with their feet,” often deciding not to enter self-employment contracts in states with increasing income tax rates.
The second article, “Behavioral Responses to State Income Taxation of High Earners: Evidence from California,” by Joshua Rauh and Ryan Shyu, focuses on California’s Proposition 30, which significantly increased marginal tax rates for high-earning individuals in the state in 2012. The authors demonstrate that high earners were indeed very sensitive to Proposition 30. In response to the 3-percentage-point increase in the top marginal state income tax rate, which reached 13.3 percent in 2012, high earners reported $321,000-$436,000 less in taxable income during 2012-2014—about 10 percent of their baseline income of $4.15 million.
The third article, “The Introduction of the Income Tax, Fiscal Capacity, and Migration: Evidence from US States,” by Traviss Cassidy, Mark Dincecco, and Ugo Antonio Troiano, uses a historic panel dataset on U.S. states from 1900 to 2010 to demonstrate that the introduction of the state income tax led to significant outmigration of middle- and high-income individuals. The authors differentiate between pre- and post-World War II periods and show that “late adopters” (states that introduced the income tax after 1945) experienced lower revenue growth and higher outmigration rates than “early adopters.”
One of the most striking findings in the paper is that states that introduced the income tax in the post-war period lost more than 16 percent of their population within 20 to 30 years after the reform. In other words, outmigration in the long run outweighed fiscal capacity gains when new state income taxes were introduced. The implication of this study is clear: when considering new sources of revenue, lawmakers need to think beyond the short-term logic of taxation and account for the long-term implications of increased tax burdens, especially in an increasingly mobile economy.
In conclusion, taxes do affect migration and nonresident labor supply, factors policymakers need to consider when implementing tax changes. As we move forward, it is crucial to continue studying these dynamics to ensure that tax policies are designed in a way that promotes economic growth and opportunity, rather than driving away high-income individuals who contribute significantly to tax revenues.