Why Tax Policy Does Not Predict Population Growth
The Case of Slow-Growing New Hampshire
I was referred a question on Twitter today about tax policy and population growth, specifically in New Hampshire.
New Hampshire is ranked #7 in the Tax Foundation’s State Business Tax Climate Index (full disclosure: my previous employer). A 7 ranking means very pro-economic-growth tax policy, provided you accept the Foundation’s argument that generally low, simple, neutral, and transparent taxes promote growth. For reference, New Hampshire scores this ranking mostly because they have no state income tax on general wages. This is a debate about whether or not having no income tax does Good Things for a state.
Mr. Tengdin’s Tweet reveals an expectation: that if tax policy is so good, it should manifest in faster population growth (a classic Good Thing states want). The truth, however, is quite different: tax policy may have little impact on headline population growth rankings compared to other states.
Regular readers will be surprised by this. I’m on record many times saying that low taxes attract migration, and even that tax cuts can lead to relative improvements in net flows. Am I backtracking? Not at all. The reason is simple.
Population Growth is More Than Migration
A population can experience a faster growth rate in any of 4 ways: the birth rate can rise, the death rate can fall, the migration inflow rate can rise, or the migration outflow rate can fall. Those are the options.
There is basically no reason to think that state tax policies meaningfully alter the rates at which people are born or die. No state has a child tax credit of sufficient size to meaningfully alter the calculus compared to the Federal credit (as far as I know), and existing state marriage penalties are unlikely to have large impacts on headline fertility either. And although the presence or absence of estate taxes could lead to people who expect to die to relocate, those people are likely to be old people, and so the full effect of the tax will manifest through migration, not through an actual change in death likelihoods. Taxation may be theft, but it is almost certainly not murder.
So when we think about the ties between taxes and population growth, we should think exclusively about two channels: changes to migration (inflows or outflows), and changes to economic growth that may alter marriage and fertility decisions. That second channel requires me to create way more complicated models and is probably very small in the short or medium run, so I’ll ignore it. Basically, taxation only effects year-to-year population growth through its effects on migration.
Insofar as demography is the test of tax policy then, population growth is a silly metric. Migration is what matters. So we need to look at New Hampshire’s migration.
But actually, let’s hold off on that. Let’s look at New Hampshire’s non-migration demographics. Before we even consider migration and the role of taxes, we need to check what the pre-migration baseline actually is.
New Hampshire Has Few Young Women
And Those It Does Have Aren’t Having Many Babies
New Hampshire has the second lowest share of of its female population in the 20–34 age bracket, which is by far the age at which most mothers have most kids. That is changing to some degree as age of childbearing rises, but not that much. Meanwhile, the fertility rate for that age group in New Hampshire is also among the lowest in the nation. And don’t worry, I didn’t cherry-pick, fertility rates are on the low end for younger mothers too, though a bit better for older mothers, but neither older nor younger women make up a large share of the population.
New Hampshire has two things holding back its population growth: an aging population with comparatively few young people, and cultural or economic conditions that lead to very low rates of motherhood. No amount of tax policy will turn back time on aging, and no plausible tax policy will meaningfully induce women to have lots more babies.
By the way: the fertility problem isn’t getting worse in New Hampshire. Fertility has been fairly constant since 2005, even rising very slightly. But the aging problem is getting worse. If the generational composition of New Hampshire’s population had remained steady from 2005 to 2014, the state’s population growth from 2010 to 2014 would have risen from 0.76% to 1.02%. It’s only a 1-place advancement in the rankings, but it’s a huge jump in terms of growth rate. So keep in mind: even apparently small or gradual demographic changes can have pretty big impacts when you look at rate measures like growth.
The Other Side of “Natural Increase”
So births are one side of the “demographic baseline.” And births are a function of the fertility rate by age group multiplied by the number of people (or population share) in that age group.
Well, the other side of the “demographic baseline” is deaths. And deaths are a function of the death rate by age group multiplied by the number of people (or population share) in that age group. The American Community Survey does not provide us with deaths-by-age data (obviously, because you can’t survey them). I’m not going to go hunting for this information elsewhere because, although it is available, it won’t change the basic point we all know: as people get older, the odds of them dying in a given year increase.
In other words, states with an elderly population have higher odds of having a high number in the “deaths” column for the demographic baseline. Well, look, New Hampshire has a large and growing late-middle-age-or-older population. Every one of those groups is rising as a share of the total population. So the relative population-wide frequency of death is likely to increase as well. In other words, more New Hampshirians are dying than in the past, and that’s only likely to increase in the future.
Where Migration Fits In
The baseline growth for New Hampshire, then, is probably really low. Few potential mothers, and low birth rates even for that group. Large amount of potential deaths. This is a recipe for low growth. Furthermore, it can contribute to low migration. Places with naturally growing populations also need hospitals, construction workers, restaurants, retail, etc. Population growth creates economic growth (through demand in the short run and supply in the long run). So areas of low natural population growth are also more likely to have low migration.
So what is New Hampshire’s migration record?
Since 2007, New Hampshire’s migration has been volatile, but overall it’s pretty much broken even. This is way better than can be said for Maine, Massachusetts, New York, Connecticut, or Rhode Island. In fact, the only other state in the area to have positive net migration over the period is Vermont, New Hampshire’s neighbor. True, Vermont has extremely high taxes and is basically the closest you get to socialism in the United States, so it’s odd that the two states would both have the highest migration in the region while having such different policies. It is notable that Vermont’s death rate has been substantially higher, and that their inflows have been disproportionately composed of retirees, with the result being that Vermont’s overall population growth rate has been even lower than New Hampshire’s. I don’t know why retirees like Vermont. Anyone who knows, please tell me, it’s bugged me for a while.
So New Hampshire has a very low “demographic baseline” for growth, and essentially break-even migration, which is among the very best in the whole region. Given that low baseline growth can lead to low migration, that’s actually pretty good. So maybe taxes really are driving migration? Aside from that pesky Vermont issue, the case looks pretty good.
Except… that’s not how it works at all.
Tax Changes and Demographic Equilibrium
The base level of taxation matters for economic growth and for migration. It does, really. But at some level, these effects get “built in.” If no state ever changed any policy every again, then the effect of policies on migration would likely eventually fall to very low levels. People who prefer or benefit from one set of goods would choose one state, others another. The only policy-related migration would be migration tied to which policies are advantageous in which parts of the life cycle, adjusted for differential rates of fertility across states. That’s all a lot of jargon to say that changes in taxation probably matter as much or more than levels of taxation. Especially if you want to look at a specific state over time, you need to know how tax policy has changed.
Migration involves innumerable factors and is actually really, really hard to predict. When we think about the role of policy, we have to hold all those other factors constant. But if tax policies have been the same for a long time, then we have to say that changes are probably not the result of policies (yes I know there’s an exception for relative policy changes, but let’s keep this simple, okay?).
Fun fact: in the 2007 State Business Tax Climate Index, New Hampshire was ranked #7, and Vermont was ranked #46. Now in 2016, New Hampshire is ranked #7, and Vermont is ranked…#46. Neither Vermont nor New Hampshire have substantively altered their tax policies within the last decade. Thus, while tax policies may be impacted them to some degree, the biggest short-term direct effects of their changes have been felt. Policy choices in each state may be helping boost their migration records in different ways, but the reality is that these are states with fairly extreme demographic profile and no demographically important tax policy changes in over a decade.
States that implement better tax policies are generally more likely to have some improvement in their net migration records. It’s not necessarily a huge improvement, and it may not last forever as people adjust to account for it and demographics shift and other states change policies to compete, but it does happen.
Does New Hampshire’s Low Population Growth Mean Low Taxes Don’t Help?
No. Think about what we’ve shown. New Hampshire’s low population growth is entirely due to low birth rates and high death rates. Migration, which does connect to tax policy, has been slightly positive, but essentially broken even. That break-even rate is the 2nd best rate in the region, with the result that New Hampshire’s migration record looks pretty good compared to its generally higher-taxing neighbors.
Taxes do impact migration, but not always in obvious ways. And that impact is usually not big enough to overcome large-scale demographic decline. The only nearby states to beat New Hampshire’s population growth were New York and Massachusetts, essentially 100% due to immigration, which is less sensitive to state taxation and more closely tied to urbanization, universities, and international image or reputation.
If you want more proof taxes impact migration, see here. And if you want to hear my case for how state taxation impacts inequality, see here. And if you think I’m wrong on the inequality point, make sure I didn’t already respond to your concerns here.
See my previous post, about the link between migration and economic mobility
Start my series on migration from the beginning.
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I’m a graduate of the George Washington University’s Elliott School with an MA in International Trade and Investment Policy, and an economist at USDA’s Foreign Agricultural Service. I like to learn about migration, the cotton industry, airplanes, trade policy, space, Africa, and faith. I’m married to a kickass Kentucky woman named Ruth.
My posts are not endorsed by and do not in any way represent the opinions of the United States government or any branch, department, agency, or division of it. My writing represents exclusively my own opinions. I did not receive any financial support or remuneration from any party for this research. More’s the pity.
