Tuesday, May 27, 2014

Maryland Tax Climate and Interstate Migration: Issues to Watch

On May 9, the Center on Budget and Policy Priorities [CBPP] released a study by Michael Mazerov which concludes that state taxes have a small impact on Americans’ interstate moves. However, migration within the U.S. is much higher than in the EU, Mexico, or even Canada. There are many factors that contribute to the high rate of migration in the U.S. But one factor that has a significant impact on internal migration is a state’s tax climate. Policymakers and legislators at the state and local level would benefit from considering the effects of their tax policies on residents’ decisions concerning whether to keep their businesses and consumer activities in state.

The Tax Foundation’s Lyman Stone brought these and other figures to light in his two recent reports responding to the CBPP’s study. He found that state tax policies in fact do relate to migration in a material way despite what Mazerov’s report may imply.

CBPP report author Michael Mazerov asserts that interstate migration is small, so it is not very important to consider the economic impact of the issue. He finds that 69% of Americans live in their home states, which means that 31% of non-foreigners in the U.S. have migrated interstate. Although Mazerov characterizes this statistic as representing “relatively few Americans,” migration in the U.S. is much higher than in neighboring nations. In Mexico, only 20% migrate, and in the EU and Canada, the numbers are much lower: 3.2% of member state residents migrate in the EU, and only 1% of Canadians migrated.

Further, the 69% figure represents a national average, which is skewed by states with very high or low migration rates. It does not take full account of states that have populations predominantly born in-state, or states in which a majority of the population migrated into the state. Such states deserve closer attention than Mazerov’s report gives them. Particularly since many of the states that experienced low migration or migration into the state are considered low-tax.

Gallup polls conducted June – December 2013 did find that taxes in some states generally matter less than some of the other many factors that contribute to a decision to migrate. However, taxes are a major factor in states like New York, Illinois, Connecticut, and our own Maryland. These are some of the wealthiest states in the nation, and therefore they have much to lose, or gain, depending on migration of revenue-generating residents.

Maryland ranked third highest among states in migration, with 47% of residents reporting that they would leave if they could; Maryland trailed closely behind Illinois (50%) and Connecticut (49%). In these top three states, “roughly as many residents want to leave as want to stay” according to the poll.

Again, while there are many factors that contribute to migration, it is significant that residents of Illinois, Maryland, and other states with high migration rates stated the top reason for planning to move was work or business related.

The Tax Foundation’s State Business Tax Index annually assesses the impact of a state’s tax system on the local business environment. The Tax Foundation ranked Maryland and other high-migration states in the lower half of its Index last year, with Maryland ranking near last at 47, as a I noted in a blog last October. Maryland also ranked 41st in the Tax Foundation’s March 2014 Facts & Figures report, which compares state tax rates, collections, burdens, and more. Maryland, New York, and Connecticut all ranked in the top-ten (high tax states) when compared on their respective high state-local tax burdens for fiscal year 2011. So there is a trend here.

There are many implications of interstate migration for state-policymakers to consider. As Gallup polls summed up some of the negative impacts: 

State leaders have important reasons for wanting to see their state populations grow rather than shrink. A growing population usually means more commerce, more economic vitality, and a bigger tax base to pay for state services. A shrinking population not only hurts government coffers, but can weaken a state politically by virtue of the potential loss of U.S. House members through redistricting every 10 years. 

State policymakers have the ability to curb out-migration by reforming state tax policy. According to the Tax Foundation rankings, “the driving force behind a state’s long-term rise or fall in the tax burden rankings is usually internal and most often a result of deliberate policy choices regarding tax and spending levels or changes in state income levels.”

Meanwhile, states with tax systems that foster business competition also tend to attract new businesses, which generate economic and employment growth. Changes to the tax code can quickly improve a state’s business climate and likely curb interstate migration, keeping skilled employees, investment, and consumer spending in state.