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States Tax, Money Walks

Article by Matthew Denhart February 1, 2013 //   3 minute read

Phil Mickelson, the famous left-handed golfer, suggested a week or so ago that he might leave California because of its high tax rates. Presumably he would move to a state with a friendlier tax regime. Mickelson was criticized heavily in the media for his comments, and has since apologized twice. But no apology is really needed. As Allysia Finley points out in a recent Op-Ed for the Wall Street Journal, Mickelson would hardly be blazing a new trail out of California if he did move. Tiger Woods, Serena and Venus Williams, and golfer Michelle Wie are other famous athletes who have fled California in favor of Florida, a state with no income tax. Baseball player Torii Hunter takes up permanent residence in tax-friendly Texas despite playing for teams based in other states (formerly in California, but now in Michigan). Tennis star Sam Querrey and golfer Nick Watney are examples of athletes who have recently left California for Nevada — another state that does not tax income. Mickelson’s comments about taxes go to show that athletes are like the rest of us, they too respond to incentives. According to the IRS — with a tip of the hat to the Tax Foundation for its great data tool —California lost on net more than 2.3 million residents to other states between 1993 and 2010, including a net of 71,905 to Florida, 345,897 to Texas, and an astounding 372,797 to Nevada. In total, California lost over $51 billion in adjusted gross income to other states over this period. Clearly, Mickelson and his athlete peers are not the only ones who realize there are other states with friendlier tax climates. Of course, to be fair to California, it is not the only state that has lost people and income recently. Travis Brown — a featured speaker at our April 2012 conference “Tax Policies for 4% Growth" — documents in his new book, “How Money Walks,” that over $2 trillion in adjusted gross income migrated between states in the period 1995 to 2010. Brown believes that tax competition explains a lot. You can order Brown’s book here, and can dive more into his data here. The lesson of all this is that tax competition matters a lot. People and businesses make decisions with at least some serious consideration of the policy environment around them. The great thing about America is that, with its 50 states, people can pack up and move elsewhere when they feel their current environment is unsuitable. This pressure sparks competition between the various states, to the benefit of citizens. While some states try to ignore the competition, Phil Mickelson is the latest reminder that their citizens do not.