Thursday, January 18, 2018

Migration and Economic Growth

Here is another update from the treasure trove of IRS migration data. 

So far, we have established that Wyoming still attracts high-income earners, for whom our state still offers an attractively low-tax environment. We have also seen that our state is losing middle-class families, to whom the balance between what money they can make here, and the taxes and other cost-of-living items paints a completely different picture than it does for wealthy residents. 

Today, we will add a couple of numbers that reinforce the point about middle-class flight. First, though, it might be worth keeping in mind that the migration imbalance is not to our state's benefit. At first glance, it seems reasonable to conclude that if we gain more income than we lose, we should end up with more money being spent in our state. That, in turn, should boost our economy. Right?

There are two fallacies with this argument. First, unlike people who rely entirely on their work-based income, wealthy people often own more than one home. They may spend summers in Teton County, enjoy fall in a house in New Hampshire and then snowbird in Florida. In doing so, they spread their spending over several states, significantly weakening the prospect of a boost to the Wyoming economy.

That is not to say wealthy residents do not contribute to Wyoming; of course they do. We should applaud each and every one of them for their success and achievements, and for what they do for our state. We should welcome everyone who wants to come to our great state and make it better. 

That said, it is important to understand the practical economic meaning of wealth migration: just because someone makes $1m per year after tax, it does not mean that his home state will benefit from the entirety of the spending out of that million.

The second fallacy is in comparing the duration of residence between middle-class families and people of wealth. Moving is costly, disproportionately so for low-and-middle income earners. It is easier for people with a lot of money to uproot themselves in one place and settle somewhere else. 

In other words, when we gain residents because our tax system is relatively beneficial to wealthy taxpayers, we also increase the segment of our state's population that will be quick to leave the state if that relative advantage changes. How much can you drive up the cost of living with, say, a sales tax on services and 15-20 percent increase in the assessment value of the state's property tax before Wyoming loses its relative advantage?

What does the prospect of a Gross Receipts Tax do to our tax competitiveness? If our legislature passes the bill mandating businesses to report gross receipts, will it, or will it not, make it more likely for wealthy people to make Wyoming their home?

There is more. Working families, living paycheck to paycheck or with small margins, are less inclined to move than wealthy people are. This means that when we lose them, we probably lose them for good. It is going to take a lot of hard work by our next governor and future legislative sessions to convince people who have left our state, to come back again. 

Which brings me to the statistical update. I have received a few questions about correlations between migration and various economic variables. So far I have only had time to run comparisons on a small set of data; in order to draw any solid conclusions I need to have multi-year data sets. I have the raw data for that on several variables - what I don't have is enough time to run all of it at once. Therefore, I will have to continue to release piecemeal information. 

With that said, here are a couple of more observations, based only on 2015 migration data. 

First, I ran GDP growth data for all the states against migration data in and out of Wyoming. When it comes to actual numbers of people moving in and out of the state, those are best reflected in the next part, which compares migration to job growth. When it comes to GDP growth per se, it is actually more interesting to look at income migration. The reason for this is that states with strong GDP growth have solidly growing markets for small-business products. If you can't make a living as an entrepreneur in Wyoming, you look for a state where consumers and other businesses are thriving. In other words, it would be reasonable to expect high-growth states to attract more money per migrating tax return, than states with relatively slow growth.

QED:

Table 1

GDP Growth Outbound per-return income 
Top 23 states 2.40% $80,874
Bottom 23 states 2.04% $35,020
Sources: Internal Revenue Service (income migration) and Bureau of Economic Analysis (GDP)

Of the 46 states for which the IRS reports reliable migration data, the 23 that attracted the highest incomes per outbound tax return, are also the 23 states with the highest average GDP growth rate. In other words, the upper-row number, with the $80,874 worth of income leaving Wyoming with every tax return, likely represents a relatively high share of small businesses and self-employed entrepreneurs.

The lower row, on the other hand, consists of low-income families, who have been punished here in Wyoming by a plummeting economy and left out to dry by a legislature and a governor with their heads in the sand. Proud as they are, they refuse to stay and live off welfare. They will take whatever job they can find, pack up and drive to wherever it takes. 

The difference between these two groups is consistent with the difference in GDP growth numbers. In fact, if we look more closely, this difference becomes even clearer: 

--The top-ten states receiving Wyomingites got, on average, $118,401 per return; their (unweighted) average growth rate was 2.6 percent per year;
--The ten states receiving the lowest migrating income averaged only $24,239 per return; their (unweighted) growth rate was 1.5 percent per year. 

Now for the jobs growth comparison. Or, as we used to say back home: "It ain't rocket science, Shirley". 

Here, I looked at the share of outbound tax returns that each state attracted. For example, with 1,641 returns moving to Colorado, the Centennial State received 17 percent of the total outbound migration of 9,634 tax returns. I then grouped the 46 states into quintiles, each representing nine states (ten in the last one) in declining order based on their share of all outbound tax returns.

I then compared the tax-return share to the unweighted average growth in jobs per state, per quintile. Here are the results:

Table 2

TR share Jobs growth
I 6.77% 2.06%
II 2.11% 0.97%
III 1.12% 0.78%
IV 0.76% 1.20%
V 0.33% 0.86%
Sources: Internal Revenue Service (tax return data) and Bureau of Labor Statistics (jobs growth)

Simple, predictable pattern: the stronger jobs growth a state has, the more Wyomingites will move there. 

Again, this is a rather obvious finding. Nevertheless, it has a profound economic-policy message to our legislators as they head into the session: 

Don't raise taxes! 
Get government out of the way of job creators! 

In her announcement speech, gubernatorial candidate Harriet Hageman pointed to the necessity of a regulatory renovation plan for our state. That will go a long way toward boosting our economy. Regardless of who will win next November, it would be great if our lawmakers threw the Revenue Committee's Taxmageddon plan out the window and started working on Hageman's idea right now.  

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