Recent headlines have suggested that California’s population is still growing, albeit at the slowest pace in state history.
However, that growth is from foreign immigrants deciding to move here.
Other Americans are not convinced that California, once the golden place to move to, is worth a relocation. Our research clearly shows the biggest culprit: taxes.
From 2011 to 2017, 750,000 more people moved out of California than those who moved in from other states. The only other state that suffered a greater net outflow was New York, which lost 1.1 million over the same seven-year period.
California and New York ranked among those states with the highest rates of taxation. According to the Tax Foundation’s most recent “State Business Tax Climate Index,” out of 50 states, California ranked second highest with New York following closely behind at third.
If you’re wondering which state ranked highest, that was New Jersey. Not surprisingly, from 2011 to 2017, New Jersey experienced a net loss of 550,000 residents. That represented a net outflow of 62 New Jersey residents per 1,000 in population, the highest relative loss for all 50 states.
The two states with the highest net domestic inflows from 2011 to 2017 were Florida at more than 800,000 and Texas at about 700,000. It’s not a coincidence that neither of these states have a personal income tax. In terms of their overall tax rankings, Florida ranked 46th while Texas was 35th.
Rather than relying on cherry picking state outliers, we conducted an analysis of all 50 states that included each state’s rank in the Tax Foundation’s “overall rank.” Our study included a composite weighting of corporate taxes, individual income taxes, sales taxes, property taxes and unemployment income taxes. That overall tax rank was then compared to net relative domestic migration over the most recent seven years (2011-2017) from the U.S. Census Bureau’s American Community Survey. The migration data was made relative by dividing the sum total of domestic migration for each state by that state’s population in 2018.
The resulting positive correlation between each state’s tax ranking and each state’s relative net migration rate was significant at the 0.99 level of confidence. That is, higher tax ranks were strongly associated with higher relative net migration outflows.
The strong positive relationship between higher tax rates and migration outflows was more clearly revealed by dividing the states into quartiles on the basis of each state’s overall tax ranking. Chart 1 clearly shows that the 13 states in the highest quartile tax ranking experienced, on average, the highest average net outflow (-18.2 net outflow per thousand population). In sharp contrast, the 12 states in the lowest tax quartile, on average, experienced the highest average net inflow (+22.0 net inflow per thousand population).
California is one of the 13 states included in the highest quartile ranking. Its outflow from 2011 to 2017 of -17.8 per thousand is roughly equal to the -18.2 average for all 13 of the highest tax states.
Chart 2 shows the quartile breakdown for total rather than relative net average domestic migration from 2011 to 2017.
Of the total net outflow of 2.7 million people in the highest tax quartile, California represents 753,000, or 28%, of the total outflow.
These findings strongly reinforce the popular saying that people “vote with their feet.” High relative state and local taxes lead to a persistent outflow of people to states with lower taxes. Conversely, states with lower taxes act as a magnet attracting people from high tax states. It’s really common sense—people want to keep more of the money they earn.
Over time, migration trends seem to lead to a destructive economic cycle: As people leave states with high relative state taxes, those states, in turn, increase taxes even more to offset the loss in taxpayers. But that response only serves to exacerbate the migration outflow.
Perhaps that explains why Sacramento is working on legislation that will increase rather than decrease taxes. The California Tax Foundation has tabulated more than $6.2 billion worth of potential tax increases pending in the legislature. That figure does not include $200 billion in new taxes that would be required to fund a statewide universal healthcare system (SB-562) or $49 billion in new sales taxes on business services.
California, however, is not alone. New Jersey ranks highest in taxes and highest in its net outflow of -62 person per thousand. Second highest was Illinois with a net outflow of -57 per thousand.
Yet, the most recent soundings from New Jersey is Gov. Phil Murphy’s call for $1.5 billion in new taxes from expanded sales taxes and higher personal income taxes on incomes over $1 million. It’s pretty much the same in Illinois with Gov. J.B. Pritzker proposing that the state’s flat income tax be scrapped in favor of a progressive tax that would yield an estimated $3.6 billion in revenue. Such an increase would represent a tax increase of over 20%.
Democratic Gov. Gavin Newsom is all that is standing between higher taxes and more residents leaving. It’s not a hopeful scenario. He has embraced new higher taxes on things like drinking water and phones to pay for new programs like paid family leave and an expanded individual health mandate.
Expect the outmigration cycle to continue.
Editor’s Note: James L. Doti is president emeritus of Chapman University and one of the nation’s most preeminent economists. Raymond Sfeir is director of Chapman’s Anderson Center for Economic Research.
