Every day in America the 50 states compete against each other for people, jobs, investment capital, and overall prosperity. This interstate competition is economically healthy because it forces governors and legislators to adopt fiscal and regulatory policies that maximize job opportunities and prosperity for their citizens. Right-to-work laws and low income taxes are the two policies that matter most in terms of the prosperity of states. If every state were to adopt the pro-growth policies recommended in this study, each state and the nation as a whole would be better off.
The competition among the states is becoming more intense as businesses become more mobile. Toyota and Boeing are two high-profile employers in America that have crossed state borders because of the policy advantages of one state over another. Toyota moved from high-income-tax California to no-income-tax Texas, and Boeing, based in Washington, a forced-union state, opened a new plant in South Carolina, which has a right-to-work (RTW) law. Texas Governor Rick Perry and California Governor Jerry Brown have openly sparred in recent years about which state is more pro-business. Interstate competition allows governors and legislators to learn from each other about which policies create wealth and which policies diminish wealth inside their borders.
In recent years, governors have generally divided into two competing camps, which we call the “red state model” and the “blue state model,” raising the stakes in this interstate competition. The conservative red state model is predicated on low tax rates, right-to-work laws, light regulation, and pro-energy development policies. This policy strategy is now common in most of the Southern states and the more rural and mountain states. Meanwhile, the liberal blue state model is predominantly found in the Northeast, California, Illinois, Minnesota, and, until recently, Michigan and Ohio. The blue states have doubled down on policies that include high levels of government spending, high income tax rates on the rich, generous welfare benefits, forced-union requirements, super-minimum-wage laws, and restrictions on oil and gas drilling.
In no area are the effects of these competing models more evident than in tax policy changes of recent years. California, Connecticut, Hawaii, Illinois, Minnesota, New York, and Oregon have raised their income tax rates on “the rich” since 2008. In four of these states, the combined state and local income tax rate exceeds 10 percent, reaching 13.3 percent in California and 12.7 percent in New York. Meanwhile, the “red states” of Arizona, Arkansas, Kansas, Missouri, North Carolina, Oklahoma, and Idaho have cut their tax rates. This has widened the income tax differential between blue states and red states for businesses and upper-income families.
Similarly, red states such as Oklahoma, Texas, and North Dakota have embraced the oil and gas drilling revolution in America. Blue states such as New York, Vermont, Illinois, and California have resisted it. Blue states have raised their minimum wages; red states generally have not.
In this study, which is a summary of our recent book with Rex Sinquefield and Travis Brown, An Inquiry into the Nature and Causes of the Wealth of States: How Taxes, Energy, and Worker Freedom Will Change the Balance of Power Among States, we examine whether these policy differentials matter and, if so, by how much.
The answer is that the states’ policy choices on taxes, regulation, energy policy, labor laws, educational choice, and so forth have a large and in most cases a statistically significant impact on the prosperity of states over each 10-year time frame examined on a rolling basis from 1970 to 2012. There are always exceptions to the rule, but in most cases the red state model is substantially outperforming the blue state model.
We find in particular that two policies matter most. Right-to-work states substantially outperform non–right-to-work states, and states with no or low income taxes have a much better economic record than high-income-tax states.
Taxes. On taxes, we compare the nine states without a personal earned-income tax (Alaska, Florida, Nevada, South Dakota, Texas, Washington, Wyoming, New Hampshire, and Tennessee) with the nine states with the highest income taxes (Kentucky, Minnesota, Maryland, Vermont, New Jersey, Oregon, Hawaii, New York, and California). The results are shown in Chart 1:
- Americans are voting with their feet to keep more of their income. The nine zero-income-tax states gained an average of 3.7 percent of their population from domestic in-migration from 2003 to 2013, while the highest-income-tax states lost an average of 2.0 percent of their population during the same period. Overall, population growth on an equally weighted basis from 2003 to 2013 was twice as high in the low-income-tax states. In terms of raw population, the nine zero-income-tax states in total gained an average of 830 people per day from domestic migration throughout 2004–2013; meanwhile, the nine highest personal income tax states in total lost an average of 944 people per day from domestic migration. The flow of families from high-tax to low-tax states is unmistakable.
- The jobs growth rate was more than double in the zero-income-tax states than in the high-income-tax states, on an equally weighted basis. Businesses such as Toyota are more likely to set up operations in low-tax states. This kind of business relocation to low-tax states is happening routinely and even accelerating. Of the four largest states, from 1990 to June 2014, the jobs growth rate in red states Florida (46 percent) and Texas (65 percent) has been almost triple the jobs growth of blue states California (24 percent) and New York (9 percent).
- Interstate migration has resulted in the zero-income-tax states gaining more than 14 percent of their 2009/2010 adjusted gross income from the rest of the nation between the tax filing years 1992/1993 and 2009/2010. Meanwhile, the nine highest income tax states lost 8.8 percent of their 2009/2010 adjusted gross income over the same period.
Right-to-Work Laws. On the effect of right-to-work laws, the same picture comes into sharp focus. A right-to-work law does not prohibit a union, but empowers individual workers to choose whether to join the union (and pay dues for political purposes). As of January 1, 2013, 23 states were right to work and 27 were forced union. Comparing these states’ economic performance, we find:
- People are moving to right-to-work states. Population growth as an equal-weighted average from 2002 to 2012 was 12.6 percent over the past decade in RTW states and only 6.5 percent in non-RTW states. Over the same decade, the equal-weighted average net domestic in-migration to RTW states was 3 percent, while forced-unionization states realized an equal-weighted loss of 0.9 percent. No doubt much of this population transfer occurred as people moved to where jobs are.
- The right-to-work states enjoyed a jobs growth rate more than three times that of the forced-union states. Job growth was up 6.8 percent in RTW states and only 1.9 percent in non-RTW states.
We have examined this same data set for the past four decades, and regardless of the time period measured, the results show the same directional change in favor of right-to-work and no-income-tax states with only some variation in the magnitude of the change.
Our critics deny that these economic forces are in play, and we briefly respond to those critiques below. However, it is noteworthy that New York State, whose politicians in Albany have acted for decades like taxes do not matter, is now running ads around the country about big tax breaks to firms if they move to the Empire State. Apparently, even they now concede that tax policy influences growth. Yet Albany needs to actually change its policies, not just its public relations pitch.
How Interstate Migration Is Changing America
To know the places to bet on in America, one should follow the money—and the moving vans—and the Fortune 500 companies and the venture capital funds that will finance the next Googles and Facebooks. Their movement has a pattern that is based on many dozens of factors, including the quality of the human capital in the state (how well trained and educated the workers are), a state’s natural resources (especially energy resources and good farmland), geographical proximity to national and global markets, and the weather (warm weather areas with lots of sunshine are doing better as baby-boomers retire). Many of these factors are outside the control of politicians, especially in the near term.
However, policy decisions make a big difference in a state’s attractiveness. Taxes, education policy, right-to-work laws, regulation, pension deficits, and government spending and debt are drivers of migration. This is true now more than ever, in part because the differentials between the states are widening.
Blue states, for example, have been raising their tax rates, while red states are lowering their taxes. Of states that enacted pro-growth tax cuts in 2013, 13 were red states at the time—defined as having a Republican-majority legislature and a Republican governor. Of the remaining four, Iowa and New Mexico had Republican governors while Arkansas and Montana had Republican legislatures. Not a single solidly blue state enacted pro-growth tax cuts in 2013. Twenty Republican governors have proposed tax cuts in 2015.
SOURCE: Heritage Foundation
—Stephen Moore is Distinguished Visiting Fellow in the Institute for Economic Freedom and Opportunity at The Heritage Foundation. Arthur Laffer, PhD, is the founder and chairman of Laffer Associates, an economic research and consulting firm. Joel Griffith is a Research Associate in the Institute for Economic Freedom and Opportunity at The Heritage Foundation.