(I bet nobody’s ever used THAT title for a blog post before…)
A few days ago, the Republican National Committee tweeted “Is it a coincidence that Americans are fleeing tax-and-spend states like CA for states that spend money responsibly?
#jobs”. In response, PolitiFact.com published a blog post titled “Are Americans flocking to low-tax states?” in which they half-hearted argued that the data does not show what the RNC claimed.
The research post used a lot of words — it split the states into high- and low-tax groups, and looked at the states within those buckets. We can do better.
Here I’ve used the same data sets that PolitiFact did on net migration and state tax rates. That’s a pretty decent correlation. If you want to play with the data yourself, I’ve uploaded it to Filtergraph, a neat web service that tries to make it easy to work with datasets interactively.
Well, who knows. The conservative narrative is that the higher tax rates of states like CA and NY drive workers out of the state. The data is suggestive but doesn’t necessarily prove this. The idea is basically plausible only if you stipulate that state/local governments are providing services that people don’t actually want, or providing desirable services incredibly inefficiently.
(NB: I recently read a paper which pointed out that low-skilled workers are the dominant contribution to the migration rates described above, but that high-skilled workers have very different migration patterns. Specifically, high-skill workers tend to migrate into the largest “knowledge-oriented” metros, such as NYC, San Francisco, or Boston. For skilled labor, productivity and wages are relatively much higher in those areas, but low-skilled workers don’t get enough of a wage bump to make the high cost of living a good trade-off. Unfortunately, I can’t find the paper!)
For fun, I’ve included state-level unemployment in the Filtergraph data set above. Unemployment rates have almost no correlation with either tax rates or out-migration (an R^2 of about 0.09 for each, though Filtergraph won’t automatically calculate best-fit trend lines). So it’s not all that clear that tax rates are closely tied to state economic performance.
Another Narrative: Restrictions on Housing Supply
Why does housing in Manhattan cost so much? The short answer is that supply doesn’t keep up with the demand. Part of this is due to physical restrictions — it’s an island, and building up is somewhat more expensive than building out. But another important contributor is regulatory restrictions. Glaeser et al showed rather elegantly that housing costs on Manhattan south of 125th St. are at least twice as high as the cost of constructing that housing. The authors infer that restrictions on development are contributing significantly to the lack of supply, and thus to the insanely high housing costs. (In 1960 alone, 13,000 new units were permitted in Manhattan, vs. 21,000 for the entire decade of the 90s.)
A less dramatic version of the same story plays out almost everywhere in America where there are people already living, most notably through wildly complicated use-based zoning codes that limit higher-density housing and require too much parking. In most areas, cheap housing can only be built on greenfields at the periphery of the urban area, where there are no neighbors to complain. But because there is no demand for high-density housing in these remote and cheap areas, only detached single-family homes get built. The primary result is auto-oriented sprawl.
Housing costs account for a much higher fraction of the average American’s income than do tax rates. And variation in housing costs is much higher than variation in tax rates. If a large fraction of housing costs in expensive areas is due to regulatory barriers (and not, say, higher local incomes), we might expect low-skilled workers to be driven to cheaper states. I grabbed Census data on median housing costs by state, taking a weighted average of owner-occupied and rental units, and then normalized by median 2009 household income from Wikipedia. (This data is also available on the aforementioned Filtergraph page.)
The evidence isn’t clear. The fit here is statistically weaker than for tax rates. But median housing costs isn’t a perfect proxy for regulation — some states have low housing costs because there’s no demand, not because of a less regulations on development. And low-wage workers don’t get the same salary boost from living in productive metros that high-wage workers typically do, so median income may not be the appropriate normalization. We really need better data to distinguish between these explanations! In general, though, I’m more sympathetic to the “regulatory tax” narrative, simply because the costs involved can be much larger than the differential tax rates between states.