IRS data doesn’t show that money walks

Nan Madden
Mar 10, 2016

A new report out today relies on an incorrect use of IRS data to make claims about income leaving the state that aren’t supported by that data. A related assertion that tax policy changes are a major driver of people’s decisions about where to live also runs counter to the evidence.

The Internal Revenue Service (IRS) releases data about households that move from one state to another. This data does not measure “income migration” from one state to another, despite efforts to use the data this way, such as in the Center of the American Experiment’s Minnesotans on the Move to Lower Tax States 2016 report released today. It is not accurate to compare the total incomes of people who moved in and out of Minnesota in a given year and describe the net difference as the loss of income from the state, as the Center for the American Experiment does.

Researchers who disagree with each other about whether tax policy has a strong impact on migration nonetheless agree that the IRS data does not accurately measure the migration of income. As Lyman Stone, previously of the Tax Foundation, writes, “The IRS does NOT track the migration of income. Money is not walking.”

That’s because when someone moves out of Minnesota and into another state, the income they earned in Minnesota doesn’t necessarily go with them – it often stays here.

  • If someone leaves their job in Minnesota to go to another state, that Minnesota-based job will likely still exist and the corresponding income (or something similar to it) will be earned by the next person who fills that job.
  • A similar outcome is likely to happen when a small business owner moves. To borrow some examples from Michael Mazerov of the Center on Budget and Policy Priorities, if a Minnesota doctor in private practice retires and moves to Florida, his patients and their payments for his services will go to another Minnesota doctor. If a business owner moves away, she is likely to sell her business to someone else who will continue to operate it. The business and its related economic activity is still in Minnesota.

In both of these cases, even though a person has left Minnesota, much of the income they had previously been earning stays in Minnesota – it just happens to be earned by someone else. And most likely that someone else will be a Minnesotan who hasn’t moved in or out of the state in the past year, and whose income is not measured by the IRS migration data. The IRS migration data does not measure whether total income in the state is going up or down because it leaves out the incomes of most people in the state.

In fact, the report’s findings that the largest amount of migration occurs among working age people is consistent with the large body of evidence showing that factors such as job opportunities, housing costs, and being close to family are much more often behind moves from state to state than tax levels.

It’s certainly true that there are consequences for a state’s tax decisions. We shouldn’t lose sight of what the 2013 tax reform bill made possible: ending more than a decade of frequent state budget deficits, and instead investing in schools, lowering college tuition and increasing property tax refunds.

Minnesota is in stronger economic and fiscal health than some would have us believe. Minnesota has low unemployment, relatively high median incomes and low poverty rates.

In contrast, many other states are struggling to make the investments that contribute to their residents’ and their state’s future economic success. For example, the Center on Budget and Policy Priorities finds that in at least 31 states, inflation-adjusted state funding for K-12 education per student in 2014 was below 2008 levels, sometimes dramatically lower. And four of the five states with the most severe cuts in K-12 education had also cut income or corporate taxes.

It isn’t the case that no one will ever move in response to tax decisions. But the impact is likely to be small and it shouldn’t deter us from the path Minnesota has chosen: a more equitable and sustainable tax system that enables us to invest in a broader and more durable prosperity.

-Nan Madden