Research shows that high state tax rates cause high earners to shift employment to lower tax states
It is generally accepted nowadays that differences in rates of state income taxation are a factor driving migration from higher-tax states like Minnesota to lower-tax states like Florida. A recent paper by economists Henrik Kleven, Camille Landais, Mathilde Muñoz, and Stefanie Stantcheva that: “review[s] a growing empirical literature on the effects of personal taxation on the geographic mobility of people and discuss[es] its policy implications” found that:
There is growing evidence that taxes can affect the geographic location of
people both within and across countries. This migration channel creates another
efficiency cost of taxation with which policymakers need to contend when setting
This body of work has shown that certain segments of the labor market, especially high-income workers and professions with little location-specific human capital, may be quite responsive to taxes in their location decisions.
But it isn’t just residence that is responsive to tax policy, new research suggests that employment is too.
As a forthcoming paper titled “State Taxation of Nonresident Income and the Location of Work” by economists David R. Agrawal and Kenneth Tester points out: “…states raise a significant share of revenue from nonresidents.”
In an earlier draft, they wrote:
As an example of the importance of nonresident income, U.S. states raise 7.5% of
personal income tax revenue from nonresidents, with nonresident employees contributing as much as 15% of revenue in some states. Even states with little or no cross-border commuters, such as Hawaii, raise 7% of revenue from nonresident income taxes. After removing interstate commuters, states collect over 13 billion dollars or 4% of revenue from nonresidents, likely from high-income earners able to work in non-adjacent states.
But the interstate labor market is changing:
Following the COVID-19 pandemic, taxation of nonresident income will likely
rise in importance. Telecommuting will allow companies to hire workers from all over
the world. As companies increasingly allow their workers to go fully remote without
any need to work in a (physical) office or abandon office space entirely, teleworking will
decouple the state of residence and the state of work (Brueckner, Kahn and Lin, 2022).
As remote work increases, how to tax nonresident income will become an increasingly
important policy issue (Agrawal and Stark, 2022), just like foreign-sourced income has
increasingly posed new challenges to the international tax system…Deciding to earn
income in a nonresident state was always possible for consulting contracts, interstate
commutes, or rental property income, but telework makes these choices commonplace.
This is the theory, but empirically this has been hard to capture because of a lack of data. Agrawal and Tester tackle that by:
…studying the effect of taxes on the location of employment by focusing on the specific labor market for professional golfers. First, extensive data on golfers is publicly available, including: their residential location, their skill characteristics, the prizes they win, and most critically, the decision of which states they do/don’t play in. Important for our analysis, we know the full slate of options facing professional golfers: we see both the tournaments that they play in and we know the tournaments that they decline. Using publicly available sources, we scrape and digitize data on the careers of professional golfers from 1977 to the present. We exploit state-level tax rate changes to identify the effect of taxes on employment location decisions.
Using variation in the location of professional athlete events and changes in state tax systems…that high-income superstars are more likely to play in places with lower state tax rates. The place of employment is responsive to taxes because the U.S. tax system, sources earnings (strictly) to the place of employment if the home-state tax rate is lower than the tax rate in the state of work.
They also explain how these findings can generally be assumed to hold for “other high-income occupations: management consultants, rental property owners, pass-through businesses, artists, and self-employed individuals that travel frequently.”
We have known for some time that higher earners have greater scope for relocating their residence in response to tax rates than the average American. Agrawal and Tester’s research suggests that they can relocate their labor more readily, too. Sensible state fiscal policy must take this into account. Sadly, such sense is rare in Minnesota right now.