July 11, 2017

People Are Moving to States with Responsible Governments

Adam Millsap

Senior Fellow, Charles Koch Institute and Stand Together

Officials in states that are losing residents need to take a hard look at their policies and do what they can to make their states more attractive.

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One of the great things about America is its diversity—diverse people, climates, cultures, geography and, at the state and local level, government policies. All of this diversity means that we can each pick a place to live and work that suits us. Economists have found—perhaps unsurprisingly—that many people are attracted to locations with sunny days and mild wintersstronger economies and lower taxes. New research from my colleagues at the Mercatus Center also provides some evidence that government policies impact migration.

Some of America’s diversity is readily apparent, such as climate and geography. Other types of diversity, like state government policies, are less clear. The Mercatus Center’s annual state fiscal rankings reveal some of the differences among state policies, including differences in pension funding, long-term liabilities and budget deficits.

Mercatus’s fiscal rankings also include a metric called service-level solvency. Service-level solvency is a measure of how much fiscal “slack” a state has to increase spending and taxes.

Each state’s service-level solvency score is constructed from three ratios: total taxes, state expenses and state revenues as a share total state personal income. Higher ratios mean that a state is closer to its tax/spending/revenue limit and may have problems raising additional revenue.

To get an idea of the variation across states, in the newest rankings government expenses are 31% of state personal income in Alaska, compared to only 9% in Florida. In North Dakota, total taxes are 13% of state personal income but only 7% in Maine. The complete data set for all states is here.

With these data we can examine the relationship between each state’s fiscal “slack” and migration. The figure below is a scatter plot of each state’s service-level solvency score and net migration rate per 1,000 people. A higher service-level solvency score means more fiscal “slack” and relatively smaller government.

As shown in the figure, there is a positive relationship between service-level solvency scores and net migration rates—in other words, states with better service-level scores tended to gain more residents.

Connecticut and Illinois are two states in well-known financial trouble that are losing people. They also have middling service-level scores, meaning they are already taxing and spending quite a bit of their residents’ income. This will make it difficult for them to raise additional revenue to shore up their finances.

New Jersey is in a similar position. Many high-income residents have left the state for lower-tax jurisdictions—particularly Florida—over the past 25 years.

West Virginia and Mississippi are also low-scoring states that people are leaving and both have weak economies. For example, over 20% of each state’s males between the ages of 25 and 54 are out of the labor force. Reforms that reduce taxes and simplify their tax codes—some of which are already being examined—should make them more economically competitive and may stabilize their populations.

Meanwhile, states such as Florida, Nevada, New Hampshire, Colorado and others are experiencing increases in population and are in relatively good shape when it comes to taxes and spending relative to total personal income. If these states need to raise taxes in the future to fund their public pensions or deal with some unexpected event, they have some wiggle room.

Migration can also impact businesses. People with bachelor’s degrees or more are more likely to move across state lines than less educated people, and they are also important employees and customers due to their skills and higher income. Government policies that push them away erode an area’s customer base and make it difficult for businesses to attract workers.

Despite the falling rate of interstate migration in America over the last 40 years, many people still move, and often to states that tax and spend less. Officials in states that are losing residents need to take a hard look at their policies and do what they can to make their states more attractive. If they don’t, their fiscal situations will only get worse.