Want Population Growth? Lower All Taxes (Except Sales)
A couple weeks ago, The Wall Street Journal published an interactive feature on state-by-state population data, as compiled by the Census Bureau. The study looks at the net population growth for each state during the twelve months ended July 1, 2007 and offers some insights into domestic migration trends. While the U.S. population increased 1.0% during the observed period, the growth rate at the state level ranged from -0.4% to 2.9%.
Generally, the trends were familiar. The fastest growing states were in the interior west (Nevada, Arizona, Utah, Idaho), while the slowest growing (or even contracting) populations tended to be in the midwest and northeast (Michigan, Ohio, Rhode Island, Vermont, New York). But there's such great disparity among the growth rates (even among neighboring states) that macro-regional conditions don't seem to fully account for it.
Turns out there's a whole class of population growth drivers that can shed additional light. A hint? It rhymes with "facts is" (according to Steve Miller).
The good people at the Tax Foundation publish an annual scorecard of state business tax climates, ranking each on an overall basis and specifically on corporate taxes, individual income taxes, sales taxes, unemployment taxes, and property taxes. In their words:
States with the best tax systems will be most competitive in attracting new businesses and be the most effective at generating economic and employment growth.
Although the market is now global, the Department of Labor reports that most mass job relocations are from one U.S. state to another rather than to an overseas location. This means that state lawmakers must be aware of how their states' business climates stack up to others in their region and nationwide.
I compared the Tax Foundation business tax environment data with the Census Bureau population growth data to see if anything useful would pop out (my hypothesis being that more punitive states would lag national population growth and more competitive, lower-tax states would thrive).
Just by comparing the 50 states' tax climate ranks with their population ranks, a general correlation emerges. Broadly speaking (as any Sim City mayor can attest), states with harsher tax climates see a drain on their population (versus the national average), while more accommodating states see faster growth.
Some edge cases and other notables are highlighted and labeled.
Admittedly, the fit is far from perfect. Relative tax rates certainly aren't the only (or even dominant) driver of migration decisions. But given that few people probably give it meaningful conscious thought when considering a move (relative to lifestyle, family, and broader regional factors, anyway), it's notable that there is a discernible correlation at all. The R-squared value for the linear regression of the data is 0.33, meaning fully one third of the variability in a population growth rank is explained by the states' tax ranks.
The degree to which people are deliberately fleeing punitive states in favor of lower tax environments is harder to gauge, but my guess would be that the correlation owes more to a differential in job creation (i.e. states with less punitive tax schemes not only attract new business, but enable those businesses to be more profitable, create more jobs, pay their employees better, etc., which in turn drives migration at the individual level).
As noted, the Tax Foundation rankings consider 5 tax categories (corporate, individual, sales, unemployment, and property). They also rank the states according to each of these categories in isolation. 4 of the 5 tax classes showed similar correlations with the population growth data (higher taxes yield lower growth). The most significant relationship was between property taxes and population growth. Despite the relationship breaking down somewhat in the middle of the pack, at the extremes (particularly among the highest-tax states), the correlation is easily visible. With an R-squared of 0.26, more than one fourth of the variability in population growth rate is explained by property taxes alone.
Of the 14 states with the highest property taxes, all saw slower (or even negative) growth, relative to the country on the whole.
Only one tax category showed a negative correlation between tax climate rank and population growth. While the effect was minor, states with higher sales taxes tended to have higher population growth. This isn't terribly surprising, as consumption taxes tend to be the least "progressive" (i.e. flattest) and thus least punitive taxes, relative to income. Moreover, states with higher sales tax rates tended to be less punitive across other tax classes and to have better overall tax climate ranks, so it stands to reason they'd enjoy better population growth.
I'll take a look at re-running the analysis using more granular data from the Tax Foundation study. Using the rankings as correlation data is illustrative, but it ignores the magnitude of the differentials among the states, which might yield stronger correlations and better insights within the individual tax categories.
Even in this relatively crude fashion though, the comparison seems to offer a fairly clear roadmap for states that want to stem population declines and become more competitive. Even during a year when housing turmoil and widely disparate regional economic conditions likely played an unusually large role in shaping migration trends, state tax policy remained a powerful economic lever.
The implication isn't complicated, but it's nonetheless too narrowly recognized and embraced. Clobbering businesses drives people away, while encouraging wealth creation by punishing it less invites people in.
Handcrafted by Flip on January 7, 2008 |
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