If you can work from home, you can work from another – lower tax – state

Recently, I undertook a short tour of Minnesota’s borders where I presented the findings of our new report, Minnesota’s Border Battles: How state policy affects economies at the margin, which looks at how state’s economic policies impact their economic outcomes by focusing on those border areas.

One of the things the report shows is that the Minnesota counties bordering the low tax state of South Dakota have seen their population fall while it has risen across the border, and that for those counties border North Dakota, also a lower tax state, population growth has been much slower on our side of the border in recent years. The correlation isn’t perfect. Counties on either side of our border with Iowa have lost population with ours losing less and we actually beat Wisconsin on this measure, although the Twin Cities distorts that comparison to a large degree. There is, I think, some further tentative support here for the consistent research finding that people move in response to taxes.

The Covid-19 pandemic might accelerate that trend. Huge numbers of people have been working from home and a job that can be done from home can be done from another state. Last week, the Wall Street Journal reported:

Drew Erra, a 52‐​year‐​old insurance broker and moving‐​company co‐​owner, and wife Melissa Erra, lived in Minneapolis for 24 years. But in July—when many Americans were realizing that working from home, remote learning and social distancing would be the new reality for a long time—they picked up and moved to Las Vegas. Their new home, a $3.2 million, arts‐​and‐​crafts home with a pool and golf‐​course views, cost over $2 million more than the one they sold in Minneapolis. “I was paying 10.5% state income tax in Minnesota,” a rate which has now dropped to zero in tax‐​free Nevada, Mr. Erra said. “Just the tax savings alone covered the cost of the house.”

Increasing the sensitivity of workers to state taxes could well be another of the less foreseen consequences of Covid-19. It is also, as so often with this pandemic, regressive: higher paid, higher skilled ‘knowledge’ workers can work from anywhere with a decent internet connection. Service workers, who tend to be lower paid, cannot. That said, these jobs will, eventually, have to move to where the customers are.

If workers do become more sensitive to state taxes as a result of Covid-19, it should give state policymakers pause for thought before hiking taxes further. And there is one further possible consequence of all this. A ‘Minnesota’ job which can be done from Nevada can be done from India too. A new wave of offshoring could be another of those ‘less foreseen’ consequences of the pandemic.

John Phelan is an economist at the Center of the American Experiment.