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STUDY: Low State Taxes Not Major Factor in Attracting New Residents

(NPN) — A mantra of South Dakota state government for at least a generation is that low taxes make the Mount Rushmore State a more attractive place to live and do business.

However, according to a new report by the Center on Budget and Policy Priorities, that widely held political belief may not be backed by the evidence.

“Differences in tax levels among states have little to no effect on whether and where people move, contrary to claims by some conservative economists and elected officials,” the CBPP report notes. “To be sure, some individuals relocate because they think their taxes are too high or take state and local tax levels into account in deciding where to live.”

Nonetheless, the report says “there is overwhelming evidence that those cases are sufficiently rare that they should not drive state tax policy formation.”

What are the major drivers of interstate migration?

Climate is a major consideration as are jobs and family.

A bigger factor than state tax rates is housing costs, according to the report.

The study found that from 1993 to 2011, South Dakota have had about 5,000 more households move out than move into the state: 195,024 moving in, 200,118 moving out.

CBPP said that this result is not unexpected for a state with a harsh climate.

“Virtually all cold, snowy states saw households leave over this period,” according to the report. “Alaska and South Dakota’s inclusion in that group despite their not levying personal income taxes is further evidence that climate has had far more to do with recent patterns of out-migration than have state and local taxes.”

The study found that it was more likely that low to middle income people might move from high tax to low tax states, not high income earners that might start businesses. Further, according to the study, those in high-income brackets that did make the move were often retirees not looking to start new businesses in their new home states.

In South Dakota, CBPP found that the average adjusted gross income of those who remained in South Dakota was $51,785. This was higher than those who left — an AGI of $39,952 — and those who moved in — an AGI of $45,115 — between 1993 and 2011.

The CBPP recommends that states facing out migration should focus on “cost-effective economic development and job-creation strategies” that increase wages for residents.

The Tax Foundation, on the other hand, says the CBPP report only tells part of the story on the impact of tax policy.

“What we’ve consistently argued at the Tax Foundation is that taxes matter on the margin, but that they’re just one of many factors,” the Tax Foundation’s Lyman Stone notes. “After reviewing [the CBPP’s] main arguments, this theme will be apparent: that [their] analysis doesn’t address the effect of taxes on the margin.”

The Tax Foundation plans to address the CBPP findings this week.

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