Another Migration Myth Busted: Most Income Doesn’t ‘Migrate’ When Residents Leave New Jersey

There’s a popular myth that never seems to go away in New Jersey: the state’s high tax levels – particularly its progressive income tax – are responsible for pushing high-income individuals out of the state. The argument goes that people leave states with high income taxes in order to pay little or no income tax in another state, thereby taking their income with them when they move and harming the economic future of their former home state.

NJPP has repeatedly busted this myth, pointing out that there’s far more to location decisions than tax rates and noting, for example, that New Jersey added over 20,000 high-income residents between 2002 and 2011 even though income taxes on those households increased twice during those years. Yet the underlying assumption of “income loss” to a state when a person moves elsewhere is perpetuated by an oversimplified analysis of IRS data – a classic example of selectively using statistics to make a point.

Last week the Center on Budget and Policy Priorities published a new report on so-called “tax migration” that goes squarely after a popular but deeply flawed argument that states with relatively high income taxes are suffering severe economic damage due to this “income loss.” The report largely builds upon a previous report arguing that state income taxes are not the impetus for interstate migration, but it also adds some new, important points to the public debate.

Most importantly, the vast majority of income counted by the IRS as “lost” due to out-migration does not depart the state, as the report notes. When most residents leave New Jersey, either for a job in another state or to retire, they don’t actually take their income with them. Instead, that income usually stays with its employer in New Jersey, and is earned by other residents already in the state or by those who move in. Of course, some income, like investment income for example, does move with an individual, but this represents only a small share of the total income “lost.” And by no means does it justify the exaggerated arguments about economic harm caused by out-migration.

What’s more, while New Jersey experienced net out-migration between 1993 and 2011 (329,000 households moved out), it actually saw an increase in the total number of people employed – the state both filled the jobs of those who left and generated 355,000 new jobs during that time. In addition, overall income in New Jersey grew significantly during that time (as it did in every other state). It is, therefore, grossly misleading for would-be tax-cutters in New Jersey to treat the wages of people who left the state as income “lost” to the state economy when the data clearly demonstrate the opposite.

In the end, using the “income migration” argument to advocate for tax cuts – as so many in New Jersey do – would be a self-defeating prophecy. Without the revenue to provide and maintain high-quality education, roads, mass transit and other vital services, highly skilled people (and the companies that employ them) could choose to leave New Jersey in search for a better quality of life, endangering the state’s long-term economic growth.