Would Progressive Taxes Drive People Away From Illinois?

Yes. But…

Illinois is debating implementing a higher-rate progressive income tax. I won’t waste time describing the tax policy details for you, because three different people asked me about this issue recently, so I assume the facts are reasonably well understood by my interested readers: if implemented, Illinois taxes would rise for all tax payers, and rise the most for high-earners.

Now why do I care? Well, I don’t care. Except that the Illinois Department of Revenue issued a “Fiscal Note,” which is a short note attached to legislation estimating the effects of the law. You can find the bill and the note here. But I’ll quote the relevant portion of the note:

[As a result of the tax’s implementation] in the First Four Years… More than 43 thousand additional people move out of Illinois… Population and Labor Force decrease compared with the baseline scenario (current conditions and economic trend). This is a result of increased out-migration due to higher tax burden.

So to be clear, the claim is:

1. The plan would raise taxes (everybody seems to agree on this)
2. As a result of higher taxes, out-migration would increase.
3. In the first 4 years after implementation, that increase in out-migration will amount to 43,000 people.

The question I’ve gotten is: Are these claims plausible? I won’t adjudicate Claim #1 since there doesn’t seem to be that much debate on it. So let’s jump to claim #2.

Do Taxes Boost Out-Migration?

Yes. Well, Actually… Yes, But On The Other Hand, It’s Complicated.

On net, higher taxes do tend to reduce net migration. If you disagree with this, you’re disagreeing with an extensively and repeatedly established fact of the academic literature. Nobody seriously disputes that, all else being equal, higher taxes are not preferred. If you want a summary of academic literature, you can find one I did last year here and here. I won’t re-hash the details. The summary is: a broad consensus in the academic literature suggests that differences in tax burdens not compensated for by differences in amenities have some impact on migration.

Now, the heated debate is about compensating amenities, as well as the size of the effect. People who favor smaller government say that (1) the government-provided amenities usually aren’t “worth it,” and (2) the effect of this bad trade-off is worth worrying about. People who favor a larger government say that (1) government-provided amenities are usually “worth it” and (2) even when they aren’t, not many people actually use taxes to make decisions.

My personal perspective is that (1) the exact details of how revenue will be spent can have an enormous effect on whether a tax is “worth it” and (2) the effect of this trade-off is worth worrying about. So I fall in the academic camp that tends to provide arguments that support lower taxes based on worries about out-migration. However, where I differ, is that I think virtually the entire effect is driven by what tax revenues are spent on. That is to say, most states probably could raise taxes without hurting migration if the money is spent really well, while many states could actually cut taxes and lose migrants if they cut really valuable government spending.

But, hold on. That’s net migration. There actually isn’t as much research separating “net” and “gross” impacts of specific policies. And what research does exist on policy and migration suggests that the main effect of policy is not on changing rates of outflow, but on changing rates of inflow. This is a technical argument that bores most people, but it’s important. People always worry about brain-drain, about bad outflows, but repeated academic studies find that most volatility in migration is driven by changes in inflows. For just one fun example, recent study shows that the Dust Bowl exodus… didn’t really happen; or at least wasn’t abnormal. Big population losses weren’t due to high Okie outmigration, but low inmigration.

I’m not sure what claim the Fiscal Note is making: are they claiming 43,000 more people will leave, or are they claiming net outflows will worsen by 43,000 people. These claims matter. See, if they find that 43,000 more people will leave, then the net effect is almost certainly larger, maybe a net loss of 120,000 people, since inflows usually adjust more dramatically than outflows. But if they are saying net flows will worsen by 43,000, then probably just 10–20,000 of that is new outflows.

But either way, yes, the IL DOR almost certainly is giving the correct direction of effect of a tax increase: higher taxes, lower migration.

But Is 43,000 the Right Number?

Depends on What It Means. But… It Seems Plausible

I don’t have a migration “model” for Illinois. I’ll let IL DOR handle that. But what we can do is put that 43,000 number in perspective. Let’s look at Illinois’ migration statistics over the last 4 years, and then add in the 43,000 based on its different possible meanings, as described above.

In terms of net flows, 43,000 more net out-migrants, or 43,000 more gross out-migrants along with a presumably larger number of lost-future-in-migrants, is a substantial change. Assuming 2011–2014 levels of migration continue, the IL DOR is forecasting that the large tax hike proposed would worsen Illinois’ net migration by between 13 and 35%. I’ll go ahead and say that seems somewhat higher than the usual range I’d expect, but then again, it is a large tax hike, and they are offering these changes over a sufficiently long time period to get substantial adjustments, so it seems like a plausible figure, without considering how revenue is used.

In terms of gross outflows, we have to look at 2 cases. If the Il DOR’s 43,000 number refers to increases in gross outflows, that’s a whopping… 3.6% increase in outflows over 4 years. If we assume 43,000 is a net number including reduced inflows, then outflows would rise by just 1.7%. Those numbers definitely seem plausible to me given the size of the tax increase.

All in all, IL DOR’s forecast looks to be pretty reasonable. But of course, critics will say that they didn’t consider the use of revenues which, as I noted, is sort of the whole ball game. So let’s do that.

What Is the Public’s Business?

Preferences Are Fickle Things

Academic research on migratory preferences related to specific spending items is less precise than I’d like. But broadly speaking, a couple trends stand out. People tend to have a revealed preference for areas that spend on (1) transportation (2) education (3) emergency services (controlling for crime rate). Crucially by the way, that “education” variable excludes spending on pension liabilities. Because other research shows people tend, on average, to migrate away from places that spend heavily on (1) debt obligations (2) health and welfare (even after controlling for poverty) (3) pensions and retirement (4) other entitlements.

Put plainly, the typical migrant only likes to pay taxes if they receive a tangible benefit in the short- or medium-term. Most migrants evidently do not prefer to pay taxes to finance historic debt, provide income to non-workers, or provide social services to the needy. I’m not making a value judgment here saying whether these things are true or not, just offering a brief synopsis of what most of the literature seems to say. Roads, schools, and police spending: attracts migrants. Debt, pensions, and welfare: does not attract migrants.

So if tax increases go to pay for classroom instruction or new educational facilities, or for new transit lines and road improvements, or for a new airport, or to hire more cops, there’s reason to think a tax increase could boost migration. Individual people cannot buy a transit line or a school easily, so the elasticity of migration for the provision of desired public goods is more than 1: a dollar spent by the public on education or transportation seems to have, on average, more value to the typical would-be migrant than a dollar privately spent on alternative goods and services. Again, this isn’t universally true, it’s just true for the median potential migrant, according to most studies I’ve read that touch on this issue. On the other hand, when taxes rise to service long-term obligations or welfare, the average migrant seems to prefer to keep their money.

With that in mind, ask yourself how Illinois is likely to use new tax revenues. Will they fund current goods and services that directly benefit current and future wage-earning taxpayers? Or will they fund long-term or legacy obligations that yield few benefits to would-be migrants? I am not an expert on this, so I leave you to make your own judgments.

Plus, a caveat: taxes and spending aren’t everything. Political climate matters too. There are a small number of studies that find that political corruption may negatively impact migration, while a large number find that “welcomingness” or the general attitude of friendliness of a state can matter. If a state has a rancorous political climate that spills into the public view and impacts social life, it may negatively impact migration.

Furthermore, economic malaise hurts migration more than any policy. No basket of policies can boost migration if there’s no economic opportunity. Insofar as taxes or spending policies impact economic growth, their impact on migration may be larger. All the studies I review assume that taxation and spending have no impact on economic growth. So if you think lower taxes or higher spending boost growth, then you may prefer other results.

Finally, the experience of municipalities, Puerto Rico, and developing countries suggests that bankruptcy has its own, independent, punishing effect on migration. The sample size here isn’t big enough to have really strong results, but migrants appear to really hate the chaos and uncertainty that goes with public bankruptcies. That said, an orderly restructuring that allows policy improvements may boost migration in the long run. In the shorter term though, the actual or perceived financial instability may have dramatic negative impacts on net migration.

Conclusion

I’m not an expert on Illinois politics or policies (well, not anymore). So I leave it to readers to make judgments about how specific policies related to questions of economic growth, bankruptcy odds, and the exact composition of spending. But I can respond to the question I was asked: is the IL DOR’s migration forecast reasonable? The answer is clear: yes, it absolutely is. I’m assuming they were told to assume some kind of unaltered spending baseline, which means they assume probably no new spending, or new spending is identical to old spending. Under those straight-baseline assumptions, IL DOR’s forecast seems quite reasonably within the range of plausible estimates. Economic shocks or other outside factors could have much larger effects that swamp taxation, but their estimate nonetheless seems fair to me.

Check out my new Podcast about the history of American migration.

If you like this post and want to see more research like it, I’d love for you to share it on Twitter or Facebook. Or, just as valuable for me, you can click the recommend button at the bottom of the page. Thanks!

Follow me on Twitter to keep up with what I’m writing and reading. Follow my Medium Collection at In a State of Migration if you want updates when I write new posts. And if you’re writing about migration too, feel free to submit a post to the collection!

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.