Tax Burden Too High? Lower Income Taxes.

Created by Jeremy Jackson |

During North Dakota’s recent legislative session, several tax reforms were proposed and debated. Some passed, such as a bill to exempt military benefits from state income tax and the continuation of state funding of social services (intended to offer property tax relief); other ideas, including a proposal to tap the Legacy Fund to lower income taxes, failed. With legislators considering various proposals to lower North Dakotans’ tax burden, it is worthwhile to consider what separates a good proposal from a bad one. As an economist, I’m inclined to follow the research.

I recently published a letter addressing calls to eliminate North Dakota’s property tax. While some states have a zero income tax rate, no state has ever abolished property taxes, and that’s partly due to economics. I explained:

“Property taxes are among the most efficient tax instruments available to state and local governments. The property tax also tends to be one of the most stable and predictable sources of revenue... Income taxes distort the labor market in a way that property taxes do not. That is why most economists favor the use of property taxes to generate needed state and local revenues.” (Read the full letter here.)

In addition to efficiency losses from labor market distortions, income taxes also adversely affect state in-migration—a critical issue for states like North Dakota trying to expand their workforce and diversify the economy.

Economics has a long tradition of respecting the mobility of resources and the consequences of taxing those resources. One way to avoid a tax is to move to a different geographic location where the tax rate is lower. Because residents and businesses are mobile, they will tend to move to areas with lower tax rates. This realization spawned an entire research stream known as tax competition.

While businesses can relocate, individuals themselves are much more mobile. This means efforts to redistribute income using personal income taxes are not very effective. Feldstein and Wrobel addressed this in their 1998 paper “Can state taxes redistribute income?” published in the Journal of Public Economics. The answer is no. Due to migration, changes to state income taxes diminish efficiency without achieving any net income redistribution. This happens because the wages and employment structure in a state are highly responsive to changes in progressive taxes.

A similar result is supported by the work of Cebula and Alexander (2006) published in the Journal of Regional Analysis and Policy. They find that states with a lower individual income tax burden see an increase in net in-migration. The reverse is also true; states with higher personal income taxes experience a decrease in net in-migration. Interestingly, in-migration is also linked to higher state and local spending per pupil on education.

The negative relationship between high income tax rates and decreased in-migration is further supported by Cebula (2014) in the Journal of Labor Research. Related work has found that individuals migrate toward states with relatively low tax burdens in general, not just personal income taxes.

If we want our state and local governments to operate efficiently, and if we are serious about addressing our workforce needs, legislators should focus their tax relief efforts on the income tax. No state has abolished property taxes—and for good economic reasons. If North Dakota wants to reduce the tax burden on its citizens, the income tax is a much better target.

Meet the Author

Jeremy Jackson is the director of the Center for the Study of Public Choice and Private Enterprise (PCPE) and an associate professor in the NDSU Department of Agribusiness and Applied Economics. Read his bio.

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