The (Tax) War Between the States

The Wall Street Journal 12/10/07

A record eight million Americans moved from one state to another last year. Where is everyone going, and why? The answer has little to do with climate: California has arguably the nicest climate of any state in the nation – yet in this decade more Americans have left the Golden State than entered.

Migration patterns instead reveal which states have the most dynamic and desirable economies, and which are “has-been” states. The winners in this contest for the most valuable resource on the globe – human capital – are generally the states with the lowest tax, spending and regulatory burdens. The biggest losers are almost all congregated in the Northeast and Midwest. Liberals contend that tax rates, regulation, forced union laws and runaway government spending don’t matter when it comes to creating jobs, high incomes and a higher quality of life. People tell us otherwise by voting with their feet.

The American Legislative Exchange Council has just released a study we’ve done that presents a 2007 Economic Competitiveness Rating of the 50 states, based on 16 economic policy variables, including taxes, regulation, right to work, the legal system, educational freedom and government debt. Over the past decade, the 10 states with the highest taxes and spending, and the most intrusive regulations, have half the population and job growth, and one-third slower growth in incomes, than the 10 most economically free states. In 2006 alone, 1,500 people each day moved to the states with the highest economic competitiveness from the states with the lowest competitiveness.

State Competitiveness Rankings 2007

Top 10 % of new residents 2006 Bottom 10 % of new residents 2006
Utah 4.0% Vermont 4.2%
Arizona 4.7 New York 1.5
South Dakota 3.6 Rhode Island 3.2
Wyoming 5.4. Ohio 1.8
Tennessee 3.1 Kentucky 2.9
Virginia 3.8 Hawaii 4.8
Colorado 4.2 Maine 2.9
Georgia 4.1 New Jersey 1.8
Idaho 5.2 Illinois 1.9
Texas 2.7 California 1.5
Average 4.1 Average 2.6
Source: ALEC, 2007


Of all the policy variables we examined, two stand out as perhaps the most important in attracting jobs and capital. The first is the income tax rate. States with the highest income tax rates – California and New York, for example – are significantly outperformed by the nine states with no income tax, such as Texas and Florida. As a study from the Atlanta Federal Reserve Board put it: “Relative marginal tax rates have a statistically significant negative relationship with relative state growth.”

The other factor for attracting jobs and capital is right-to-work laws. States that permit workers to be compelled to join unions have much lower rates of employment growth than states that don’t. Many companies say they will not even consider locating a factory in a state that does not have a right-to-work law.

Our study also finds that states with antigrowth tax and spending policies don’t just lose people. Noncompetitive states like New York, Michigan, Pennsylvania, Illinois and New Jersey are plagued by falling housing values, a shrinking tax base, business outmigration, capital flight and high unemployment rates, and less money for schools, roads and aging infrastructure. These factors of decline hurt the poor the most.

The Northeast is the classic case of a region suffering from self-inflicted wounds. In the year 2006, it was home to a smaller share of the U.S. population, and produced a smaller percentage of America’s total value-added, than at any time in the nation’s history. Why?

One big reason is that governments in the Northeast are about one-fifth more expensive than in the rest of America ($6,000 versus $5,000 of state spending per resident). An average-income family of four still saves $4,000 in lower income, property, sales taxes and fees by moving to just an average-tax state, and more like $6,000 a year by moving to, say, Florida. Since the Northeastern states tend to have highly progressive tax systems, the incentive to flee is even greater for higher-income earners.

Northeasterners complain disdainfully of the “war between the states” for jobs and businesses, and for good reason: They can’t win. Southern and Western states are cherry-picking companies from the North Atlantic states. One Southern governor (who didn’t want to be identified) recently told us his state had closed its economic development offices in Europe. “Why search for factories overseas when we can plunder high tax areas like Connecticut and New York?” he said.

Auto and other manufacturing jobs are still being created in America – but in Alabama, North Carolina and even Mississippi. It has to be infuriating to Northeasterners to learn that people and businesses are “trading up” by moving out of their region to the likes of Georgia and Alabama. But they are.

The states losing population are in effect suffering from a slow-motion version of the economic sclerosis that paralyzed much of Europe in the 1980s and ‘90s, particularly France and Germany with their massive welfare systems. At least the European socialist nations are finally starting to change their taxing and spending ways to win back jobs.

No such luck in this country. Five of the states near the bottom of our competitiveness ratings – Illinois, Maryland, Michigan, New Jersey and Wisconsin – have enacted major tax increases in the last two years. Maryland and Michigan just raised business and income taxes on upper-income earners, while arguing that raising the cost of doing business will attract more businesses. More likely it will induce companies to stay away, and people to move out.