Where taxes matter, and where they don’t
Don’t you hate posts about the “Two Americas”? Get ready for another.
This is a follow-up to my recent posts on state income taxes. Here I’ll argue that the supply-side argument is gradually weakening at the state level. But first let’s dispose of that silly liberal argument that taxes don’t matter. Here are some facts:
1. Liberals favor really high MTRs on the rich.
2. No state has a top income tax MTR of 20%. No state even has a 15% bracket. And the only 2 with at least 10% top rates just so happen to be the only two places in America with decent weather (and hence a captive audience).
3. Liberals control the government in a number of states.
4. Ergo, liberals are terrified of the incentive effects of taxes, no matter how much they mock Art Laffer. They secretly agree with Gov. Brownback.
But here I’d like to make the opposite argument; the case for supply-side effects is gradually weakening. In a recent post I said:
In the old days high taxes would make people and companies move to other states. Commodity industries are highly competitive on price. That’s Kansas and Louisiana. But the new economy in places like Manhattan and Boston and DC and Silicon Valley has companies with lots of market power, and people so rich they care more about amenities than a few extra bucks. So that works in favor of the progressives, but not yet in all 50 states.
We’ve looked at the Iowa/South Dakota area, now lets look at population growth in New Hampshire and Massachusetts, and the amount by which New Hampshire outpaces the Bay State:
Period New Hampshire Massachusetts Difference
1960-70 21.5% 10.5% +11%
1970-80 24.8% 0.8% +24.0%
1980-90 20.5% 4.9% +15.6%
1990-2000 11.4% 5.5% +5.9%
2000-10 6.5% 3.1% +3.4%
2010-14 0.8% 2.9% -2.1%
The late 1970s saw the famous tax revolts (Prop 13, Prop 2 1/2, etc.) People were fleeing “Taxachusetts” for New Hampshire. But that period is over, and Massachusetts (especially Boston) is now growing faster. Perhaps this represents the concentration in the newer info-tech jobs in the big cities. But I think it’s more than that. New Hampshire also has lots of high tech jobs. I think it reflects the fact that highly educated Millennials are becoming more fond of urban living, and find a house in the suburbs to be boring.
But not all of them. Some still do prefer suburban living, and when you combine that with the strict zoning laws in many “blue” cities, you end up with a more complicated picture. There are now, yes . . . here it comes . . . TWO AMERICAS!!
InfoAmerica and CommodityAmerica. InfoAmerica in concentrated in the big cities of the blue states (New York, Boston, DC, LA, the Bay Area, Seattle). In those places, taxes are less important, because it’s all about the amenities. Infotech workers are willing to pay modestly higher rates, even in states (like California) where the higher taxes don’t produce good services.
CommodityAmerica is (fittingly) more materialistic (although oddly also more religious.) These people prefer bigger cars and big suburban homes. They aren’t interested in edgy urban areas. They are more strongly incentivized by lower taxes. Texas is the undisputed King of CommodityAmerica. Texas has a reputation for sucking people in from high tax New York and California, but I believe on closer inspection they are actually sucking in more people from CommodityAmerica states with 5%, 6% and 7% top rates (and the same cheap housing as Texas.) All of the states close to Texas are not just growing far slower than Texas; they are all growing slower than the national average.
Of course there are exceptions. Austin is Infotech and low tax, and is (therefore) the fastest growing city in America. Buffalo is in high tax New York State, but is part of CommodityAmerica. Is there anyone left in Buffalo? I haven’t been there recently. BTW, there’s a reason Buffalo has an NFL team and Austin doesn’t; Buffalo was once one of America’s great cities.
PS. I do realize there are many sweeping generalizations here, and that the picture is complicated. Yes, in aggregate, more Millennials are moving to the suburbs than the cities. But I still believe the trends I’ve identified are real enough that they are influencing politics and public policy in lots of areas. The surge of support for very high minimum wages in Seattle and LA can be seen as just another “tax”: that Millennials are willing to pay.
PPS. One thing that makes the collapse of population growth in New Hampshire especially interesting is that it is arguably the best place to live in the entire world, especially if you are in the bottom 20% of the income distribution. It’s both rich and relatively equal. But it’s a bit too expensive for CommodityAmericans and a bit too boring for InfoAmericans.
PPPS. Minorities? I’d guess blacks lean a bit toward CommodityAmerica, while Asians lean toward InfoAmerica. Hispanics seem somewhere in between. But these are guesses, and I’d be interested in your views.
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15. June 2015 at 14:39
I think the slowdown in population growth in New Hampshire is probably more about differences in demographics/birth rates than anything. According to Wikipedia, New Hampshire is 92.3.% Non-Hispanic White. Massachusetts is “only” 75.1%.
Just looking at migration between states, New Hampshire still had a net inflow of 66,100 people from Massachusetts from 2000-2010.
http://interactive.taxfoundation.org/migration/
15. June 2015 at 15:09
You need to distinguish sharply between income and property taxes. The tax revolts were about property taxes. Property taxes are much more efficient, visible and harder-to-evade than income taxes. Thus, they are unpopular, especially because fall heavily on the medium-income wealthy (retirees/long-time homeowners in prosperous areas), who are the most powerful voice in local politics other than public sector employees and much of the reason for the enormous growth in inequality in the Anglo-Saxon countries. These are places with community “planning,” a.k.a. having insane chauvinists show up at meetings and make public policy out of their fetishes, conspiracy theories and selfish obsession with property values.
Because they were never about containing public spending, tax revolts have failed to do so. They were not public spending revolts; they were existing homeowners seizing rents from outsiders. Here is the perennial fool and charlatan Stephen Moore proclaiming:
“Did Proposition 13 really starve state and local services? Hardly. In real dollars, California’s budget climbed from $55 billion in 1980 to $97 billion in 1992 “” a 75 percent increase above inflation! Only in government would a 75 percent real spending hike be considered inadequate and neglectful. What about revenues? In the 1980s state tax revenues as a share of Californian’s incomes actually rose “” from 11 to 12 percent.”
California’s population only grew 30% over the same period. So public spending grew more than twice as fast as population. Somehow, Moore thinks this is a success. He seems to think that there were Laffer curve effects from lowering the property tax rate. Pray tell what these could be in a place where building homes had just been steadily criminalized throughout the 1970’s. The only effect was that rents from the government-created scarcity of housing were captured by land and homeowners.
I think your “fastest-growing” points are entirely beside the point. The coasts do not grow because they do not want to do so. None of the high-taxes regions want to add population. Here in the Bay, Mayor Lee has a big bold plan to seize on supply forces to make housing cheaper in SF: it’s 1% growth per year in the housing stock!
There are other pro-growth places like Texas without as much growth, but this is an accident of history not income taxes so much. The core-periphery forces of economic geography dictate that growth will generally happen in certain places, in belts, because of the gains to variety and transport costs. See Krugman and Fujita. Thus, even were america entirely homogenous as to land-use policy, growth would still clump up in places with some small natural advantages that snowball. Texas has a national border in a time of high immigration and mineral wealth. That’s good enough. The income tax might alter tilt things to texas, but again this is like pointing at a particular piece of gravel that caused an avalanche. It’s all about letting people build housing.
15. June 2015 at 15:39
Fun posts. Remarkably enough, rural America is heavily subsidized by urban America. This fact becomes obvious if one ever looks at net federal spending and taxes by zip code or state.
Almost all rural infrastructure is subsidized, from railroads to highways to telephone and Internet service to airline service to water projects to electricity projects. And that’s just the start.
Without urban subsidies, rural America with just about blow away. And the whole second home in the sticks jazz would be dead too.
15. June 2015 at 16:27
As a life long Silicon Valley resident and high tech worker, the thing that has deterred my peers, friends, and relatives from relocating to other areas is fear. High tech workers who are married usually have spouses who work in the high tech industry as well. If one spouse had the desire to relocate to someplace like Austin, the fear is that the other spouse would not be able to find a job given that the number of tech companies (and therefore job openings) does not match that of Silicon Valley.
Large tech companies like HP and Apple have tried to get their employees to relocate to Texas. But neither firm covers the complete cost of relocation. Nor do they take a recent relocation into account when laying off workers. People here have seen plenty of examples of coworkers who relocated for their jobs and then were promptly laid off. No one wants to be the next victim who pays the double cost of relocating and losing his job.
When HP realized that not many employees were willing to relocate to Texas, it tried to fill job openings there by recruiting locally. But there were not enough qualified people to fill those jobs.
15. June 2015 at 16:32
I think this discussion does not distinguish the effect that taxes may or may not have on the work and innovate vs. leisure margin [what Laffer was talking about] with the with the incentives to move. The latter depends as well on the efficiency of government in providing services that taxpayers want.
15. June 2015 at 17:35
I think your interpretation in the title of this post is wrong. Taxes matter everywhere but they are always and everywhere only part of the issue. As a long time resident of the NYC suburbs, i was always impressed by the grand arbitrage betwen suburbs accross the region including different parts of NY, NJ, and CT. Differing income tax, property tax, quality of schools, access to the city, etc, but price was the great equalizer as areas with lower taxes, better schools (mostly CT) where more expensive than similarly located suburbs elsewhere. Many a friend came to the same conclusion that there was no obvious superior choice as the market had adjusted.
My point is that individual utility functions will differ, but changes in tax policy will quickly lead to changes in real estate price, particularly where well located property is limited.
15. June 2015 at 17:36
I’m in the process of relocating and have looked at this issue quite a bit. For me, I am interested in my total tax primarily and margin tax for the purposes of planning tax avoidance…
What I have found is that there are some states that rank all over the place depending on what you read….take Delaware for example…in one article it is a top tax state and in another a one of the lowest. In this ranking Texas and California are both middle of the road…
http://wallethub.com/edu/best-states-to-be-rich-poor-from-a-tax-perspective/11257/
But in nearly all NYS is the highest…so I am glad to be leaving….it also has one of the highest rates of dilapidated bridges and now the highest rate of maximum security breakouts….
15. June 2015 at 18:15
Zack, That doesn’t explain why the net flow is now out of New Hampshire.
Lewis, I can’t see how your comments relate to my post. Is there something specific I said that you disagree with? Or are you simply assuming that I must hold a certain set of views that I do not in fact hold?
Gordon, I read that Austin had a large and growing high tech sector. Is this not true?
Thomas, Yes, but taxes are the more important part of the equation. California’s higher taxes are not compensated for with better services (compared to Texas.) The main group attracted to California by the services are welfare recipients.
Pemakin, I agree that taxes matter everywhere. I was speaking loosely–where they more important, and less important.
Engineer, Any tax ranking that suggests Texas and California are similar should be ignored. If you move to Texas you will pay less taxes than in California.
15. June 2015 at 19:53
“Gordon, I read that Austin had a large and growing high tech sector. Is this not true?”
Yes, Austin’s tech sector is growing. But if you take a look at the Austin chamber of commerce website, there are only two tech companies employing 6000 or more employees in the area – Dell and IBM. If you look at the companies that are significant players in tech, none of them are in Austin. They’re either in the Seattle area or the SF Bay Area. Dell was a tech leader at one time but faltered over the last 10 years.
BTW, another reason why so many tech companies are here in Silicon Valley and remain here is that this is one of two locations in the U.S. with an interchange for all the major network service providers. The other location is in Virginia.
16. June 2015 at 04:12
The fall in the marriage rate will generally make urban living more attractive relative to suburban living.
16. June 2015 at 04:56
Over the past twenty five years crime has fallen tremendously. Having to live with a high crime rate was a huge disincentive to living in a city from 1970-2000. Now that crime is low it makes much more sense to live in a city like Boston than in the sticks like New Hampshire.
16. June 2015 at 05:21
Some interesting points made by commenters. The comment about crime was very interesting. Also the idea that had California encouraged housing in the past 30 years, it would be a high tax state with a large population growth.
16. June 2015 at 05:39
Several other points:
1) Although red/commodity states are more religious, they also have more single motherhood than blue states. I believe this mostly the blue states/InfoState place more importance on education or developing resume culture (vs religious culture.)
2) In terms of minorities, the spread of Asian-Americans and Latino-Americans is still the more Southwest your state is the more you have these minority groups. (So California has the highest population of both minorities and shrinks as you move Northeast.) This has less to do with state choices where minority communities exist to help new Immigrants. There are lots areas in California where you start in LA/Orange County and drive through streets with Korean, Cambodian, Arabic, and Spanish etc. store and restaurant businesses.
3) So it sounds like you agree that the main reason for lack of massive business movement to red/commodity states is skilled labor supply. Only Texas (and possibly Utah) have labor supply to handle these businesses and stealing the most skilled people from surrounding states. (Also Is Minnesota/Twin Cities the InfoState for the Upper Midwest? I remember at the office, we had all kinds of people from Wisconsin, Dakotas, and Iowa.)
16. June 2015 at 06:26
Benjamin Cole:
“Remarkably enough, rural America is heavily subsidized by urban America. This fact becomes obvious if one ever looks at net federal spending and taxes by zip code or state.
Almost all rural infrastructure is subsidized, from railroads to highways to telephone and Internet service to airline service to water projects to electricity projects. And that’s just the start.”
This is true, but the even more remarkable fact is that Democrats are still much more likely to support those rural subsidies, whereas Republicans oppose. Here’s a vote on an amendment to limit Essential Air Service. It was a vote to table the amendment, so voting “No” meant wanting to limit Essential Air Service; almost Republicans except for the moderate Mainers voted against airline service subsidies for rural areas. Here’s a vote on the sugar program, 60% of Republicans wanted to get rid of it, 60% of Democrats wanted to keep it. Votes on Amtrak to rural areas, the FCC subsidy to rural phone companies and Internet access, etc., it’s all the same.
While there’s some difference, especially among areas particularly effected, in general the rural subsidies stay alive because of the votes of urban Democrats.
16. June 2015 at 06:40
LOL, “Lewis” schooling Sumner, who gets defensive. You can’t make this stuff up, it’s priceless.
16. June 2015 at 07:06
My story and experiences are anecdotal but may help. I relocated to the Philly-Wilmington area from Charlotte two years ago. The reason is similar to Gordon’s reason for staying in the Bay Area: more industry specific jobs. There are more banking jobs here than in Charlotte now. With the demise of Wachovia and the perpetual downsizing at Bank of America I’m more secure here despite the fact that it’s more expensive here than in CLT. My relo was paid for, but I didn’t get a pay increase to move here. I still think it’s worth it due to job security.
The downturn scared everybody. It may be that more people are willing to pay a bit more to be in an area with more available jobs: cities.
As for Millenials we have a lot of them in our office. Generally speaking they fall into 3 categories. 1. Single. They live in Center City-Philly, rent and probably have roommates, don’t have cars and take Amtrak down to our office in Wilmington. 2. Married. First time buyers who live in a condo in Center City or maybe a townhome in Kennet Square or in Newark, DE near UD. 3. Married with little kids. They live in the burbs in a single family home in Media, Downington, Chadds Ford or West Chester. Once they have kids it’s all about schools.
16. June 2015 at 09:06
This is a great post. I have just finished reading Edward Glaeser’s books on cities, and this post chimes in nicely.
16. June 2015 at 09:10
Dr. Sumner,
Not trying to be argumentative here, but I was only commenting about a specific comparison you made between New Hampshire and Massachusetts. You said in the past “People were fleeing “Taxachusetts” for New Hampshire. But that period is over, and Massachusetts (especially Boston) is now growing faster.” The most recent migration data shows there are still more people moving from MA to NH every year than vice versa. You correctly pointed out that NH now has had net outflow in recent years with the country as a whole, but the same is also true of MA. From browsing through the Tax Foundation numbers, it looks like New Hampshire’s losses have almost all come from states that fall into one of two categories:
1. Warm weather states (not a lot they can do about that)
2. Other states with low or no income taxes
It still looks like they’re generally gaining residents from the rest of the Northeast region.
16. June 2015 at 09:18
Thanks Gordon.
Russ, Good point.
Sourcreamus, Good point.
Ben, I agree, California is so nice it can support relatively high taxes. I say relatively, because of course even their taxes are far lower than liberals recommend.
Collin, You said:
“So it sounds like you agree that the main reason for lack of massive business movement to red/commodity states is skilled labor supply.”
There is a lot of movement to red states, but among highly skilled workers there is often a preference for the amenities of blue states. Thus businesses that need those workers stay on places like Manhattan and the Bay Area.
If I had to generalize, I’d say red states are better for low and moderate income workers, and people on federal welfare programs (low cost of living). Blue states are better for the affluent, and people on state welfare programs (which are more generous in blue states.)
Ray, Said,
“LOL, “Lewis” schooling Sumner”
Let’s see, Lewis writes a post that has little do do with anything I said, and misinterprets my views. Ray likes the post. Why am I not surprised?
Thanks Anthony.
16. June 2015 at 09:24
Thanks Blue Eyes.
Zack, New Hampshire’s population growth has fallen from over 20% a decade to nearly zero, while the US continues to gain population at a good clip. I simply don’t believe that such a big relative change could reflect birth rates. And indeed the migration data has gone from a net inflow to a net outflow. Now you are right that there is still a small inflow from Massachusetts, but nowhere near enough to offset the collapse of the New Hampshire supply-side boom. By that period being over, I meant the period of a large flow of people to New Hampshire.
16. June 2015 at 10:09
Another way to look at it is to compare the marginal cost/scalability of today’s leading industries from yesterday’s leading industries. The marginal cost of selling additional software/information is negligible compared to selling additional cars/parts. As a result, today’s info centric companies can much better afford higher marginal tax rates. When you can scale to infinity without significant costs, what is an additional 5% in taxes?
16. June 2015 at 11:30
I think your general split of commodity/info is generally accurate, and your general point about the effects of marginal taxation are also generally correct. What has turned out to be a very odd development in the information economy is that the intangible capital that it has built has turned out to be just as or even more immobile than the physical capital associated with more traditional industries. Sure, you can create subsidiaries to house IP and the like, but that’s not where the intangible capital really is- 20 years ago the futurists looking at what the internet could do thought it would be the end of the office as people would “telecommute”. And yet today, the business model of the most cutting edge companies, whose traditional physical capital consists mainly of office furniture and workstations, still revolves around the idea that people produce the most value when there are many of them in the same physcial space. The trend in floorplans has moved almost uniformly in the direction of trying to increase the amount of in-person interaction rather than in trying to use technology as a substitute for it.
This is what underlies your point- at the state level, goverments have comparatively more headroom to scalp the value of the intangible capital without it fleeing than they used to.
The geographic concentration of the intangible capital is also what drives industry clusters. Clusters work because they solve problems for both sides of the labor market- employers know they will be able to replace departing employees with specialized skillsets reasonably quickly, and the employees know that they will have other employment options without needing to relocate. With so many dual-income households, this is a major issue.
The location choices of millenials is related. If you are one of these highly educated millenials with any ambition, you have essentially no choice but to move to one of the industry cluster cities. It’s not so much about fondness for urban life or the ammenities but rather the reality that if you want a high-earning career you need to either be directly in one of these industry clusters or in one of the white-collar service industries (e.g. legal, consulting, finance) that orbit them. In a related and self-reinforcing effect, the nearly forced-choice to live in one of these cities is also driven by the aspiration of people like this to build a social circle and marry someone who is in some sense ‘like them’. Whether or not there are ‘tech jobs’ for you in NH, your odds of achieving that there are terrifyingly small compared to Boston.
The talk about urban ammenities and the like is mostly millenials making virtue of necessity. Their decisions are mainly made because they are afraid of getting locked out of their core life aspirations. Compared to those, a 3% difference in marginal tax rate is laughable. If you look at surveys (Joel Kotkin) or behavior (Charles Murray), the actual personal desires and personal behavior are much more (small-c) conservative than their stated politics or the media image. They overwhelmingly want eventually to live in a house in the burbs with good schools, “eventually” is the key word- they can’t really afford it. When graduate-level debt is involved, even a double-professional-income household can’t really afford to own a house commensurate with their social aspirations until their early/mid 30s
16. June 2015 at 12:13
I completely agree with your main point. I still think you may be underestimating the demographic effect on differences in population growth though. According to Wikipedia, the Non-Hispanic White population in New Hampshire increased by 3.2% from 2000-2012. That doesn’t sound like much until you consider the fact that the white population for the U.S. as a whole increased by just 1.4% in that span. Almost all of the country’s growth at this point is coming from minority groups that have been vastly underrepresented as a share of NH’s population.
My only point was that demographic differences are probably the reason Massachusetts is seeing more population growth than New Hampshire these days. Other than that, I don’t disagree with anything you’ve posted on the issue.
16. June 2015 at 16:04
John Thacker—very interesting comment. I wonder if the old log rolling is going on. The Donks support a rural pink wonderland in exchange for votes on their pet projects.
16. June 2015 at 23:58
@Scott
A few observations..
1. No jobs – no one goes there.
2. Few jobs – few people go there.
3. Employers pay what they need to get employees. This offsets whatever other attractions/disadvantages a particular place may have for an employee.
4. Employers (except maybe start-ups) measure everything down to the penny including taxes, wages, utilities, freight, raw materials and go wherever it’s cheapest to get the inputs they need.
5. Tax usually isn’t the deciding factor, and when it is, most state and local governments will give very significant tax breaks.
17. June 2015 at 10:55
Pras, Good point.
Matt, Very good observations. But I still think there is a bit of cultural change here. Millennials don’t seem to like to drive as much, for instance. Many don’t even have cars.
Zach, OK, fair point, but then that begs the question of why lots of Asians and Hispanics aren’t moving up there.
John Thacker, David did a post on that at Econlog–good observation.
dtoh, Even if tax is not usually the deciding factor (and I agree with you there) it can be important enough at the margin to explain modest differences in population growth rates. No income tax probably explains why NH grew much faster than other New England states in the 1960-2000 period.