By Richard S. Davis
More evidence that taxes influence where people choose to live comes in an analysis of income tax records published earlier this year. In “How Money Walks”, Travis H. Brown, head of a St. Louis-based consulting firm, explored the migration of people and wealth among the states using data from the Internal Revenue Service. He contends — and the data support him — that states that successfully attract wealth pursue pro-growth tax policies and shun income taxes.
It’s a quiet migration, the steady movement of wealth and people from states imposing high personal income taxes to states with low or no such tax. Consider it the best of all passive economic development programs. Washington ranks among the wealth winners. In the 15 years between 1995 and 2010, we’ve gained $10 billion in adjusted gross income (AGI, the starting point in most income tax calculations). That’s money brought to the state from people who have relocated.
Most of that money, $4 billion, came from California. Oregon transplants brought another $2 billion. Other states shipping wealth and people here: Illinois, New York and Alaska.
The California hemorrhage is profound: $32 billion of lost AGI over the 15-year period, with no signs that the flow has slowed. Most of the California’s migration went to tax-friendly Nevada, followed by Arizona, Oregon, Texas and here. Although a net loser, California gained some as people moved there from other hostile tax climes: New York, Illinois, New Jersey, Massachusetts and Michigan.
(Brown has put the data on the book’s website, www.howmoneywalks.com, complete with user-friendly graphics and charts.)
The IRS records confirm what other research has shown. Washington routinely performs well on most tax climate indexes, which typically reward states without income taxes. Forbes magazine ranked Washington ninth in its annual “best states for business” story, released last week. Business costs, including taxes, receive the heaviest weight in the magazine’s assessment.
The absence of an income tax is particularly important in our state because other business costs here are so high. In the Forbes business cost index, which includes taxes, Washington ranks an uncompetitive No. 27. Add an income tax and we’d drop out of the top 10 overall.
Brown’s website shows migration by county, allowing us to gain insight into metropolitan trends. Even at the substate level, where state tax policy isn’t a factor, there’s evidence that wealth and population are streaming from the high-cost metros to their cost-competitive neighbors. It’s true nationally and in the Central Puget Sound region.
From 1992 to 2010, King County lost $2.15 billion in AGI to Snohomish County and $1.56 billion to Pierce County. While all three counties posted population gains from migration, most of King County’s gain came from Los Angeles; most of the gain in Pierce and Snohomish counties came from King.
That’s consistent with patterns around the country. Urban analyst Joel Kotkin reports, “In the last decade in the 51 largest U.S. metropolitan areas, inner cores, within two miles of downtown, gained some 206,000 people, while locations 20 miles out gained over 8.5 million.”
Economic factors affect suburban and exurban growth, which slowed during the recession and is accelerating now. A consistent pattern across the nation has emerged, with struggling central cities exporting jobs and tax base to vibrant suburbs.
Within the metro area, public policies that increase labor costs will push jobs to communities with more favorable business climates. Within King County, one-time bedroom communities east of Lake Washington have become thriving economic centers, in part because of their commerce-friendly policies and lower taxes. The IRS migration data suggest the pattern extends north and south to Snohomish and Pierce counties.
Among the nation’s major cities, Seattle has shown remarkable resilience. But as Seattle politicians pursue a progressive policy agenda — including a $15 minimum wage and mandatory sick leave — more businesses will migrate outside the core. Employees seeking affordable housing, shorter commutes and lower taxes will likely welcome the change.
Americans have a long tradition of voting with their feet, of moving to create better futures for themselves and their families. Western Washington has benefited from that mobility. Money still walks. Local politicians prone to ape California’s mistakes should remember that.
Richard S. Davis is president of the Washington Research Council. His email address is email@example.com