The CBPP study argues that taxes are often much less significant than housing costs. For example, between 2004 and 2007, Arizona was the most popular destination for outgoing Californians. But it’s not clear that this was due to taxes. Indeed, many middle-income and upper-middle-income families actually faced higher local taxes in Arizona. More likely, many of them moved because of housing. Homes are much, much cheaper in Arizona, and the report calculates that the average middle-class family could reduce its mortgage costs by 24 percentage points by moving from California.
Now, as Mankiw suggests in his column, maybe we should just restrict our focus on a small subset of the population — the wealthiest, and most mobile, residents. “If you are going to take from Peter to pay Paul, Peter may well decide to leave,” Mankiw writes. “It is perhaps no surprise that state and local tax systems are less progressive than the federal one.”
But even here, the CBPP analysis found that the effect of progressive taxation on migration appears to be quite modest. The most careful recent study (pdf) looked at what happened in New Jersey after the state passed a tax increase on incomes exceeding $500,000. The results: “At most the authors estimated, 70 tax filers earning more than $500,000 might have left New Jersey between 2004 and 2007 because of the tax increase, costing the state an estimated $16.4 million in tax revenue.”
By contrast, CBPP notes, New Jersey gained about $3.77 billion in revenue from the tax increase. The state gained more far revenue than it lost, suggesting that the threat of fleeing high-earning residents isn’t always a major deterrent to lawmakers.
SOURCE: Do voters really flee high-tax states? – The Washington Post.