RIVERSIDE, Calif. — Taxes are the one topic all Americans can probably find common ground — nobody likes them! However, some people have the ability to do something about it. Researchers from UC Riverside looked at how state income taxes have affected Americans for more than a century. The findings are simple: when states raise their taxes, Americans making good money leave.
You may have seen stories about the recent mass exodus of Americans from high-tax states like New York and California to “greener pastures” in Florida or Texas. According to the new study, published in the American Economic Journal: Economic Policy, this is not a modern trend. It turns out Americans have been moving to keep more of their wealth since the introduction of state income taxes.
Ironically, state governments started implementing income taxes in an effort to redistribute wealth. States would tax residents and then, in theory, use that revenue to benefit the poorest parts of the population — essentially leveling the income playing field. However, researchers found that the plan often backfires. Historically, raising income taxes doesn’t bring in the revenue states hope for because Americans with the means to move will leave for other parts of the country where they can maintain their standard of living.
Specifically, researchers examined state tax policies from 1900 to 2010. They found that states adopting income taxes increased revenue per capita by 12 to 17 percent. However, this increase did not match up with the increases in total revenues for the government.
“Personal income tax means a tax upon labor income, first introduced for the purpose of redistribution of wealth,” says Ugo Antonio Troiano, an economist and associate professor at UC Riverside, in a university release. “The idea was to provide services to poorer parts of the population and reduce inequality between low-income and high-income residents.”
When The Going Gets Tough, The Rich Get Going
The explanation is a simple one, Troiano says. People with higher incomes have the ability to be more mobile. This doesn’t just mean they can go to nice places on vacation. It means they can also move their families out of states they don’t like anymore.
The researchers add that this ability to move to places with little to no state income tax is a very American phenomenon. In Europe, people have less ability to move to avoid income-crushing taxes. This is mainly due to language barriers between the various countries in Europe, Troiano says. For example, someone in the United Kingdom has a harder time moving to Italy just for tax breaks if they don’t speak Italian.
In America, the study finds that the phenomenon of out-migration didn’t slow until the 1980s. However, things may be ramping up again, as Americans appear to be looking for an escape from high taxes and rising costs. While New York and California highlight the modern issues of state taxes and out-migration, the researchers note that taxes have been an issue in plenty of different places throughout American history.
“In New Mexico, the legislature repealed its first income tax law in 1920. In Iowa, the state assembly passed an income tax bill in 1932 that was subsequently defeated in the state senate. In Colorado, the governor vetoed an income tax bill passed by the legislature in 1935. With the exception of Washington, however, all of these states would eventually introduce an income tax,” the study authors state in their paper.
There are only 6 states that have never introduced individual income tax:
- Texas
- Florida
- Nevada
- South Dakota
- Washington
- Wyoming
So, what should state governments do about this? While reducing income inequality is a noble goal for any state, researchers say government officials should be more mindful of simply sending a tax bill to the rich in order to fix the problem.
“Raising taxes too much might backfire, as the state might lose too many relatively wealthy contributors,” Troiano concludes.