People respond to tax environments
Published 7:39 pm Saturday, June 27, 2015
This is right up there with “A new study finds that Texas experienced higher-than-normal rainfall totals this spring.” CNBC is reporting — breathlessly, it seems — that people are moving out of states with high taxes, and into states with lower taxes, more jobs and higher standards of living.
“A CNBC analysis of tax data and figures provided by two major national moving companies shows that states with the highest per-capita taxes, for the most part, are also seeing the biggest net migration out of those states,” the news agency reports. “In states with the highest taxes — per person — the number moving out of the state is greater than the number of people moving in.”
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Of course, this isn’t news to Texans. We’ve seen an estimated 1,000 people moving to Texas every day in recent years.
CNBC compared the state’s average tax burden to the number of moving vans going in, versus the number of vans going out.
Texas, for example, has an average tax burden of $2,050 in state taxes, and its “net share of van moves leaving” is 42 percent. In other words, for every 42 people who leave the state, 58 move in.
Compare that to Connecticut, with a tax burden of $4,431. Its “net share of van moves leaving is the exact opposite — 58 percent.
What’s happening here is no mystery. People and capital are mobile. That’s exactly what Connecticut is learning the hard way. That state raised taxes over several years, starting in 2011. And in 2014, federal tax breaks expired on upper incomes. Instead of seeing higher revenues, the state law lower revenues, and eventually migration out of it.
“In April 2014, super-rich taxpayers in Connecticut and elsewhere shielded their income through charitable donations or other means to avoid a tax hit following the expiration of federal tax cuts,” the Associated Press notes. “The result: Connecticut income tax revenue plunged by nearly $281 million, more than 14 percent, compared with the same month a year before.”
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What’s going on here is something called the Laffer Curve. That curve, famously sketched onto a cocktail napkin at a dinner in Washington, D.C., in 1974, shows that raising tax rates doesn’t always mean raising tax revenues.
“At a tax rate of 0 percent, the government would collect no tax revenues, no matter how large the tax base,” Laffer explains. “Likewise, at a 100 percent tax rate, the government would also collect no revenues because no one would be willing to work for an after-tax wage of zero; there would be no tax base. Between these extremes, there are two tax rates that will collect the same amount of revenue: A high tax rate on a small tax base and a low rate on a large tax base.”
People change their behavior in response to tax policies.
They can hire smart accountants to find tax shelters, or they can move.
As Laffer notes, “Regional and country differences in various tax rates matter.”
CNBC is just now catching on. We Texans are living it.