How Do Taxes Affect Interstate Migration?

Taxes

Every year, millions of Americans pack up and move from one state to another, providing unique insights into what people value when deciding where to live, work, and raise a family. For many years, policymakers, journalists, and taxpayers have debated the role state tax policy plays in individuals’ and businesses’ location decisions. Annual data about who is moving—and where—provide clues about the factors contributing to these moves.

Taxes are one such factor. The latest IRS and Census data show that people and businesses favor states with low and structurally sound tax systems, which can impact the state’s economic growth and governmental coffers.

Each year, the IRS releases migration data showing the movements of income taxpayers based on changes in their mailing address between filing one year’s income tax return and the next. The most recent data generally show location changes that occurred between when taxpayers filed their tax year 2018 returns in calendar year 2019 and when they filed their tax year 2019 returns in calendar year 2020. Notably, because the filing deadline in 2020 was extended by three months due to the COVID-19 pandemic, the most recent data capture more moves than usual because many taxpayers went 15 months, rather than the typical 12, between filing returns for tax years 2018 and 2019.

These data, therefore, capture many of the interstate moves made early in the pandemic—between mid-March and mid-July 2020—but do not necessarily capture the bulk of pandemic-related moves, many of which occurred later in 2020 and even into 2021. As such, when interpreting these data, it is important to keep in mind that many of these moves happened before the even more pronounced shift away from large cities and high cost-of-living areas that occurred during the pandemic.

Non-governmental datasets, including from U-Haul and United Van Lines, have the advantage of being especially timely, shedding light on moves that occurred even more recently, but the IRS data are by default more comprehensive and provide important insights into the movement of adjusted gross income (AGI) among states.

Winners and Losers of Interstate Migration

The IRS data show that between 2019 and 2020, 28 states experienced a net gain in income tax filers from interstate migration—led by Florida, Texas, Arizona, North Carolina, and South Carolina—while 22 states and the District of Columbia experienced a net loss—led by New York, California, Illinois, Massachusetts, and New Jersey. When all individuals associated with each tax return are accounted for, including spouses and dependents, 29 states experienced a net gain in individuals while 21 states and D.C. experienced a net loss. Only one state, Wisconsin, saw a loss in tax returns attributable to interstate migration but a gain in individuals associated with the returns of those who moved in.

The and table below show states’ gains and losses in resident population, income tax returns filed, and AGI attributable to interstate migration.

Many factors influence an individual’s or family’s decision to move from one state to another—employment or educational opportunities, proximity to family or friends, and geographic and lifestyle preferences like weather, natural landscape, and population density, to name a few. Cost-of-living considerations, including tax differentials, may not be the primary reason for an interstate move, but they are often one of several factors people consider when deciding whether—and where—to move.

More Americans Moved to States with Lower Taxes and Sound Tax Structures

With this in mind, one observation from the 2019-2020 IRS migration data is that a strong positive relationship exists between state tax competitiveness and inbound migration. Overall, states with lower taxes and sound tax structures experienced stronger inbound migration than states with higher taxes and more burdensome structures.

Of the 10 states that experienced the largest gains in income taxpayers, five do not levy individual income taxes on wage or salary income at all, and two others had top marginal individual income tax rates that were below the national median at the time. Recently, those states have grown even more competitive. Nine of the top 10 states either forgo individual income taxes on wage and salary income, have a flat income tax, or are moving to a flat income tax.

Additionally, among the 28 states that experienced net inbound migration of income tax filers, only nine had a top marginal individual income tax rate above the national median. Meanwhile, among the 22 states (and the District of Columbia) that experienced net outbound migration of income tax filers, 15 states and D.C. had top marginal rates above the median. In the aggregate, states with a top marginal rate at or below the 2019 median of 5.4 percent gained 225,000 net new residents from the states with rates above the median.

A robust positive relationship also exists between states with below-average state and local tax collections per capita and those experiencing strong inbound migration. Of the 28 states that saw a net gain in income tax filers due to interstate migration, 22 had below-average state and local tax collections per capita in fiscal year 2020, while half of the states that experienced net outbound migration had above-average collections per capita.

Furthermore, a strong positive relationship exists between states with well-structured tax codes and those that experience net inbound migration. Among the 25 best ranking states on the 2020 State Business Tax Climate Index, which had a snapshot date of July 1, 2019, 20 states experienced net inbound migration between 2019 and 2020. Meanwhile, among the 25 worst ranking states on the Index, 17 experienced a net loss of taxpayers to interstate migration.

Why Interstate Migration Matters

One reason policymakers should care about their state’s interstate migration patterns is the effect of interstate migration on tax revenue, economic output, and economic growth over time. Between 2019 and 2020, most states that experienced a net loss in income tax filers attributable to interstate migration also experienced a net loss in income associated with interstate migration, while most states that gained taxpayers also experienced corresponding gains in AGI.

Hawaii was the only state to lose residents on net yet experience a net gain in AGI, with new residents bringing in an average of $75,000 in AGI per return while departing residents had an average of $64,000 per return. Meanwhile, only three states—Indiana, Kentucky, and Missouri—saw a net gain in income tax filers but a net loss in AGI, with new residents earning less on average than the people who moved out. Some of this is due to cost-of-living adjustments that tend to occur when individuals leave employment in one state for employment in another. For example, even if their job duties are substantially similar, a registered nurse employed in a high-cost-of-living state is likely to have a higher salary than one employed in a lower-cost-of-living state due to cost-of-living considerations that affect market rate earnings in different parts of the country.

There is evidence, however, that in states like Hawaii, the loss of relatively lower-income residents is somewhat attributable to high taxes and high costs of living causing lower- and middle-income residents to seek more affordable destinations elsewhere. Notably, four of the top five states Hawaii residents moved to—Washington, Texas, Nevada, and Florida—forgo individual income taxes on wage income. Likewise, some of the gain of relatively lower-income residents in Indiana, Kentucky, and Missouri is likely due to the relatively low cost of living in those states compared to other locations. Crucially for economic growth, however, a low tax environment also encourages investment and entrepreneurial decision-making and attracts highly mobile higher earners as well.

Higher-Income Residents Moved to Low-Tax States

The IRS data also show interstate migration broken down by AGI level. Among taxpayers with $200,000 or more in AGI, the top destinations for inbound interstate moves were Florida, Texas, Arizona, North Carolina, and South Carolina. Meanwhile, the states that saw the largest losses of taxpayers with $200,000 or more in AGI were New York, California, Illinois, Massachusetts, and Virginia. Several of the states losing higher-income taxpayers, especially New York, California, and New Jersey, have highly progressive tax codes under which tax liability rises steeply with income. States that structure their tax codes in this manner have consistently lost higher-income residents to lower-tax states, and not only the residents, but also any associated tax revenue and entrepreneurial activity that goes along with them. 

Sometimes taxpayers choose to move to a lower-tax state at least in part to reduce their own tax burden. But even those who do not consciously select for lower taxes may be doing so indirectly when they prioritize job opportunities and other factors related to the state’s economic competitiveness.

While taxes are just one factor influencing the location decisions of individuals and businesses, they are an important factor—and one within policymakers’ control. States that prioritize structurally sound tax policy improvements will reap the economic benefits that come with creating an attractive fiscal landscape in which all individuals and businesses have the opportunity to thrive. 

How Do Taxes Affect Interstate Migration?
State Tax Returns Gain/Loss Tax Returns Gain/Loss Rank Individuals Gain/Loss Individuals Gain/Loss Rank AGI Gain/Loss AGI Gain/Loss Rank Population Change Population Change Rank AGI Change AGI Change Rank 2020 Index Rank Rate Below/Above Median Tax Collections Per Capita Tax Collections Per Capita Rank Gain/Loss of Returns with $200,000+ in AGI Gain/Loss of Returns with $200,000+ in AGI Rank
Florida 81,401 1 166,707 1 $23,677,598,000 1 0.78% 8 3.1% 4 4 No Tax $4,065 45 20,263 1
Texas 62,667 2 133,450 2 $6,346,965,000 2 0.46% 14 0.7% 19 13 No Tax $4,781 29 5,356 2
Arizona 42,552 3 80,033 3 $4,800,358,000 3 1.10% 3 2.3% 8 23 Below $4,079 44 5,268 3
North Carolina 36,086 4 68,174 4 $3,644,174,000 4 0.65% 11 1.2% 14 11 Below $4,196 41 4,713 4
South Carolina 24,917 5 53,992 5 $3,585,618,000 5 1.05% 4 2.5% 5 30 Above $4,043 46 3,967 5
Tennessee 21,758 6 45,102 6 $2,642,938,000 6 0.66% 10 1.3% 12 18 Interest and dividends income only $3,768 50 2,743 6
Georgia 17,338 7 37,074 7 $1,112,905,000 12 0.35% 17 0.4% 23 32 Above $4,117 43 570 17
Nevada 16,380 8 28,073 9 $2,619,471,000 7 0.91% 6 2.4% 6 7 No Tax $4,853 28 2,331 8
Idaho 15,300 9 36,655 8 $2,054,013,000 9 2.05% 1 4.0% 1 20 Above $4,212 40 2,055 9
Washington 13,437 10 8,155 22 $1,224,248,000 11 0.11% 26 0.4% 22 16 No Tax $6,239 13 903 15
Colorado 12,892 11 10,209 16 $2,321,646,000 8 0.18% 22 1.0% 15 21 Below  $5,693 17 2,624 7
Oregon 9,515 12 11,645 14 $600,019,000 18 0.28% 20 0.4% 20 8 Above $5,231 24 1,026 13
Alabama 7,084 13 17,135 11 $511,410,000 19 0.35% 16 0.4% 21 40 Below  $3,849 49 425 19
Utah 6,810 14 17,157 10 $1,260,634,000 10 0.54% 12 1.3% 13 9 Below  $4,572 31 1,503 10
Maine 6,336 15 11,274 15 $870,092,000 15 0.84% 7 2.1% 9 28 Above $6,506 11 1,049 12
Oklahoma 5,797 16 14,792 12 $74,378,000 25 0.37% 15 0.1% 26 27 Below  $4,171 42 22 29
Montana 5,481 17 12,189 13 $1,050,293,000 13 1.14% 2 3.2% 3 5 Above $4,543 32 943 14
New Hampshire 5,309 18 9,905 18 $958,824,000 14 0.73% 9 1.7% 11 6 Interest and dividends income only $5,200 25 1,064 11
Delaware 5,117 19 9,913 17 $752,648,000 17 1.02% 5 2.3% 7 15 Above $5,968 14 895 16
Arkansas 3,940 20 9,570 19 $247,581,000 23 0.32% 18 0.3% 24 44 Above $4,328 37 239 25
Missouri 3,076 21 8,928 20 ($194,982,000) 30 0.15% 23 -0.1% 29 14 Median $3,978 47 (47) 32
New Mexico 1,837 22 1,648 26 $435,860,000 21 0.08% 27 0.8% 16 25 Below  $5,046 26 348 22
Kentucky 1,814 23 5,419 23 ($274,801,000) 34 0.12% 25 -0.2% 34 19 Below  $4,364 36 58 28
Vermont 1,454 24 3,119 24 $448,360,000 20 0.50% 13 2.1% 10 42 Above $6,642 9 570 18
Indiana 1,318 25 8,465 21 ($214,359,000) 31 0.13% 24 -0.1% 30 10 Below  $4,744 30 (45) 31
South Dakota 1,002 26 2,628 25 $207,801,000 24 0.30% 19 0.7% 18 2 No Tax $4,478 34 205 26
Wyoming 397 27 1,460 27 $862,770,000 16 0.25% 21 3.8% 2 1 No Tax $5,339 21 291 24
Rhode Island 332 28 59 29 $297,619,000 22 0.01% 29 0.8% 17 38 Above $5,931 15 355 21
Wisconsin (371) 29 507 28 ($117,214,000) 29 0.01% 28 -0.1% 27 26 Above $5,332 22 318 23
West Virginia (491) 30 (335) 30 ($69,973,000) 28 -0.02% 30 -0.2% 33 22 Above $4,272 39 (103) 35
Nebraska (2,303) 31 (4,218) 34 ($498,673,000) 39 -0.22% 39 -0.8% 45 31 Above $5,731 16 (167) 38
Iowa (2,594) 32 (3,126) 32 ($285,180,000) 35 -0.10% 35 -0.3% 36 45 Above $5,492 20 (137) 36
North Dakota (2,692) 33 (5,484) 36 ($262,349,000) 32 -0.72% 47 -1.0% 46 17 Below  $7,713 4 (166) 37
Mississippi (2,752) 34 (4,052) 33 ($52,754,000) 27 -0.14% 37 -0.1% 28 29 Below  $3,944 48 7 30
Alaska (2,805) 35 (7,118) 39 ($286,268,000) 36 -0.97% 49 -1.1% 48 3 No Tax $4,528 33 (308) 40
Connecticut (2,947) 36 (3,003) 31 ($273,281,000) 33 -0.08% 34 -0.2% 32 47 Above $8,531 2 123 27
Hawaii (3,152) 37 (9,336) 41 $70,821,000 26 -0.66% 45 0.1% 25 39 Above $7,671 5 425 20
Pennsylvania (3,344) 38 (4,866) 35 ($1,197,455,000) 42 -0.04% 31 -0.3% 35 33 Below  $5,635 19 (704) 41
Virginia (3,795) 39 (9,549) 42 ($1,094,050,000) 41 -0.11% 36 -0.3% 38 24 Above $5,660 18 (2,099) 46
Kansas (3,861) 40 (6,489) 37 ($294,660,000) 37 -0.22% 40 -0.3% 37 35 Above $5,250 23 (76) 34
Minnesota (6,238) 41 (11,307) 43 ($1,208,676,000) 43 -0.20% 38 -0.6% 41 46 Above $6,585 10 (952) 43
Michigan (6,755) 42 (6,858) 38 ($388,579,000) 38 -0.07% 32 -0.1% 31 12 Below  $4,297 38 (68) 33
Ohio (7,187) 43 (8,204) 40 ($1,446,342,000) 44 -0.07% 33 -0.4% 39 37 Below  $4,899 27 (889) 42
D.C. (8,002) 44* (15,330) 44* ($1,440,199,000) 44* -2.17% 51* -3.9% 51* 47* Above $11,809 1* (1,730) 44*
Louisiana (9,836) 44 (21,029) 45 ($573,302,000) 40 -0.45% 43 -0.5% 40 43 Above $4,412 35 (228) 39
Maryland (10,163) 45 (20,309) 44 ($1,853,927,000) 45 -0.34% 42 -0.8% 44 41 Above $6,953 8 (1,828) 44
New Jersey (12,798) 46 (23,272) 46 ($2,323,303,000) 46 -0.26% 41 -0.6% 42 50 Above $7,917 3 (1,833) 45
Massachusetts (20,395) 47 (36,982) 47 ($2,551,512,000) 47 -0.54% 44 -0.7% 43 34 Below  $7,401 6 (2,116) 47
Illinois (50,769) 48 (100,921) 48 ($8,461,854,000) 48 -0.80% 48 -1.7% 49 36 Below  $6,457 12 (8,044) 48
California (117,475) 49 (263,344) 50 ($17,815,116,000) 49 -0.67% 46 -1.1% 47 48 Above $6,999 7 (19,229) 49
New York (130,622) 50 (248,305) 49 ($19,500,234,000) 50 -1.28% 50 -2.2% 50 49 Above $10,304 1 (19,912) 50

Note: “Population change” shows gain/loss of individuals as share of state’s 2019 population estimate. “AGI change” shows AGI gain/loss as share of 2019 state AGI. “2020 Index rank” shows 2020 State Business Tax Climate Index rank (backcast). “Top marginal rate” shows state’s top marginal individual income tax rate as of January 1, 2019. “Tax collections per capita” shows FY 2020 state and local tax collections as share of state population estimate as of July 1, 2019. D.C’s rank does not affect states’ ranks but shows where it would rank if included.

Source: Internal Revenue Service Migration Data 2019-2020; Census Bureau 2019 Population Estimates; Tax Foundation calculations.