The introduction of income tax in the United States has led to a migration of higher income earners towards states with lower or no income tax, according to a new study published in the American Economic Journal: Economic Policy. Coauthored by Ugo Antonio Troiano, an economist and associate professor at the University of California, Riverside, the study examines the impact of state income tax implementation over the past 110 years. The analysis shows that states that adopted income tax post-World War II saw an increase in revenue per capita, but not in total government revenue as wealthy Americans began to move to states with lower tax rates.
The implementation of income tax was initially intended for wealth redistribution and to reduce income inequality between low and high-income residents. However, the study found that many wealthy individuals were not in favor of higher taxes and opted to move to states with lower tax rates instead. The mobility of wealthy individuals in the United States is higher compared to European countries due to the common language and ease of settling in a new city. While out-migration began to slow down in the 1980s, the study highlights the impact of tax policies on the movement of wealthy taxpayers.
States rely on income taxes to increase revenue per capita, but the introduction of income tax policies pre-World War II faced legal challenges in various states. Several states attempted to introduce income tax laws through amendments to the state constitution, but faced opposition and ultimately failed. Currently, there are six states in the U.S. that have never introduced individual income tax: Texas, Florida, Nevada, Washington State, Wyoming, and South Dakota. The study sheds light on the historical challenges faced by states in implementing income tax laws and the consequences of higher tax rates on migration patterns.
California was one of 18 states to introduce personal income tax between 1930 and 1940. The authors of the study highlight the challenges faced by states such as New Mexico, Iowa, and Colorado in passing income tax laws during that period. Through analyzing U.S. Census datasets, the researchers found that wealthier Americans were more likely to move out of state when income tax rates were high, but remained in states where tax increases were minimal. The study underscores the importance of considering mobility responses when states aim to reduce income inequality through tax policies.
Troiano emphasizes the need for states to strike a balance between raising taxes to reduce income inequality and ensuring that the state does not lose wealthy contributors due to high tax rates. The study findings suggest that raising taxes excessively could lead to an out-migration of wealthy individuals, which could have negative implications for state revenue. By examining the impact of income tax policies on migration patterns and revenue generation, policymakers can make more informed decisions on tax policies that address income inequality while also taking into account the mobility of taxpayers.
