How Do Taxes Affect Interstate Migration and Corporate Relocation

Have you ever noticed that even with the same salary, someone might end up with more money if they move from San Francisco to Los Angeles? This is because of different local tax rates in each state, and the difference will be more apparent when comparing different states.

We thoroughly analyzed various state and local tax policies to unveil how state and local taxes affect people and businesses' decision to move. Here are our findings:

• The substantial disparity in state income tax rates prompts both individuals and businesses to move from high-tax states to states with lower taxes. New York's population fell by 221,634, a decrease of 1.1%, while Texas and Florida grew by 349,575 and 444,484, an increase of 1.2% and 2.1%, from July 2022 to July 2023. Retirees remained in California due to superior healthcare and policies, leading to a 37.4% population rise from 2011 to 2022.

• People from high-tax states are moving to low-tax states, causing a sharp rise in housing prices in the latter. In Florida, Washington, and Texas, home prices increased by 116%, 106% and 83% from 2015 to 2023. In contrast, Washington, D.C., with a higher state income tax rate, saw home prices increase by 29%, below the US average of 81%.

• In high-tax states like California, the wealth gap widens yearly. Between 2011 and 2021, individuals earning over $156,000 annually rose from 12% to 31.1%. Lowering tax rates does not necessarily lead to a reduction in total tax revenue, as evidenced by Idaho's 35% revenue growth from 2019 to 2021.

• More and more companies are relocating from high-tax states. In 2021, 683 left New York, 2.3 times the number in 2011. Meanwhile, low-tax states such as Florida have attracted businesses and lowered the unemployment rate from 4.7% in 2021 to 2.5% in 2023, dropping 19 spots. The professional, scientific, and technology sectors lead the way in corporate relocations.

Income taxes vary widely across states

After-tax income varies across cities due to different state and local tax rates. For instance, someone making $1M a year in San Francisco can only take home about $510,000 after paying California state and local taxes. In contrast, in Houston, the same person could keep around $640,000 with no state or local taxes.

People tend to move to places with lower taxes

As indicated by the Population Migration Ratio in 2022, New York State sees the most people leaving due to its high individual income tax rate. We also found that states with individual income tax rates over 9% often have more people leaving, while states with lower tax rates tend to attract new residents.

According to our research, the states with more people moving in tend to have higher house price increases, and vice versa. For example, Florida and Washington, states without state income tax, had significant house price increases of 116% and 106% from 2015 to 2023. In comparison, house prices in Washington D.C., which has a high state income tax rate, only went up by 29%, lower than the US average of 81%.

States that lowered tax rates did not see a drop in total tax revenue

Despite common belief, lowering tax rates does not always lead to a decrease in total tax revenue. A report by the Hoover Institution shows that 11 states that reduced personal or corporate income taxes actually saw an increase in tax revenue.

For example, Idaho reduced its top individual income tax rate from 6.93% to 6.5% in 2021, yet experienced a 35% revenue increase between 2019 and 2021. Idaho's population is growing quickly, with around 37,000 new residents moved from other states just from 2019 to 2021. These new residents brought in approximately $2 billion in Adjusted Gross Income. According to the IRS, 30% of them came from California, a state with high tax rates.

Texa is the most popular destination for Californians moving out, accounting for 12.2% of its total outflow

California has the highest personal income tax rate in the US. Besides, California has the highest housing price in the country. Due to soaring housing prices and property taxes, many people are leaving California.

Analysis of population migration data from California shows that most departing residents move to Texas, accounting for 12.2% of the total outflow. The top four states with the largest inflow have notably low tax rates, with the highest rate at only 2.5%.

Individuals leaving California have higher average incomes

We obtained the income changes for people moving between states using IRS data. We found that the average annual income for those moving from California to Florida has been rising consistently. In 2021, the average annual income was $112,740, three times higher compared to 2011. Meanwhile, the average annual income for those moving from Florida to California has remained relatively stable.

The wealth gap in high-tax states like California is growing annually

Higher state taxes help reduce the wealth gap. California has the third highest Gini Index after New York and D.C.

We also observed a significant correlation between state income tax rates and the Gini Index. States without a state income tax have the lowest Gini Index at 0.461, while states with state income tax rates above 10% have the highest at 0.494.

Using California as an example, we got the annual household income data from the Census Bureau and found that the percentage of households earning over $156,000 a year rose from 12% in 2011 to 31.1% in 2022. In Jan 2024, California increased its top income tax rate from 13.3% to 14.4% to address this growing wealth gap.

California's elderly population is growing due to its superior healthcare system and special policies

Based on the data from the Census Bureau, the number of California residents over 65 is increasing steadily each year, with a 37.4% growth from 2011 to 2022.

Seniors in California benefit from special policies like property tax relief programs and doubling the exemption threshold compared to younger individuals. California also has a favorable climate and top-notch healthcare system in the US.

However, younger people face challenges with high living costs and taxes, leading 40% of those young people aged 18-34 to consider leaving California.

Corporates are moving faster to states with lower taxes post- pandemic

Florida's lack of state income taxes has attracted many high-net-worth individuals and companies. Florida stands out as a popular destination for business to reduce their costs and enhance their competitiveness. Major players in various industries are seeing Miami, Florida as a prime location for growth. Companies like Uber, Twitter, Nvidia and Amazon have expanded or established operations in Miami currently.

In 2020, 559 companies relocated to Florida, and by 2021, this number rose to 762. Florida's unemployment rate dropped from 4.7% to 2.5%, shifting from 28th to 47th place. In contrast, there was a significant departure of 683 enterprises from New York to other states in 2021.

From 2020 to 2021, companies across all sectors in the US rapidly relocated, with a significant focus on professional, scientific, and tech sectors, which experienced 2.9 times more relocations compared to 1994, as opposed to 45% more relocations in other sectors. This is due to the tech industry finding remote work more feasible compared to other sectors.

Methodology

We gathered data on after-tax incomes across various salary brackets in different cities from SmartAsset and analyzed the correlation between migration and state taxes using statistics from the Tax Foundation. We also collected the tax revenue growth in states that reduced their tax rates, as reported by the Hoover Institution.

We then studied migration patterns from California to other states, including the average income of those leaving California. This allowed us to understand income trends among individuals moving out of California.

By analyzing each state's Gini Index from Statista and household income distributions from the Census Bureau, we explored the relationship between state tax rates and the Gini Index. Meanwhile, we observed an increase in California's senior population based on age distribution data.

Finally, we investigated the potential connection between corporation relocation and state income tax rates by examining data on companies moving in Florida and moving out of New York, as well as tracking the relocation trends of the professional, scientific, and tech sector.

This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.