Interstate Tax Competition


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Dylan Matthews’ post on the evidence that rich people don’t flee high-tax states is interesting. One wonders how much of this relates to the regionalized nature of American political culture. If you like living in Connecticut, you’re presumably not going to just go move to Alabama to save on your taxes. But if you like living in Connecticut you might also enjoy New Jersey. Except New Jersey’s also a high tax state. And so’s New York.

Conversely, Alabama might hope to attract migrants with lots of human capital from Mississippi with its low tax rates, but this is hard to pull off since Mississippi also has low tax rates. If you look at a state pair with a steeper policy gradient, you might see bigger effects. The shape of the Boston-Quincy MSA seems to me to support the thesis the idea (which you certainly here anecdotally) that some people choose to live in Greater Boston’s New Hampshire fringe rather than other geographically closer locales in Massachusetts for tax reasons.

Bonus fact: Most Americans would faint instantly upon hearing about Swedish levels of taxation, but when I was in Copenhagen I was told that one reason many people choose to commute across the ├śresund Bridge is to avoid the even-higher Danish taxes. One suspects that if Sweden adopted Canada’s tax code, that Denmark’s current policy might become non-viable.

But of course as I said yesterday one of the key issues here is what your jurisdiction looks like on the spend side. If your higher taxes are paying for better infrastructure and superior services, then it seems to me you’re in great shape. But a problem many U.S. states will increasingly be facing is that their higher taxes will be going to pay pension and health care benefits for retired civil servants, thanks to decades of earlier fuzzy math in terms of funding these plans.