How We Respond to Higher Taxes

Targeting a sweet spot, Kansas lowered taxes three years ago. Texas and South Dakota had no individual income tax while Iowa’s top rate was 9% and Minnesota’s, 7.85%. By lowering her top rate to 4.9% and eliminating the tax on non-wage income for small businesses, Kansas could become known as a low tax state. Her goal was to attract new businesses and new residents.

You can see below that Kansas was not among the lower tax states in 2010:

From: Moretti and Wilson

Where are we going? To the impact of tax cuts.

Moving to Kansas

Hoping to uncover the influence of personal and business taxes on star scientists’ migration patterns, scholars from UC Berkeley and the San Francisco Fed looked at patent data that included locations and implied a high income from 1976 to 2010. Their conclusion? Yes, taxes make a statistically significant number of high earners want to move.

When New York lowered its top income tax rate from 7.5% to 6.85% in 2006, the likely result was 12 scientists who remained and 12 who migrated there. At a total of 24, it was a 2.1% increase that unfolded over time. In the short run, the change would have been much less.

Like New York, will Kansas’s tax cuts attract star scientists and other innovators?

Our Bottom Line: Elasticity

Looking at the connection between mobility and tax rates takes us to elasticity. A number that compares the percent change in one item to a percent change in another, elasticity focuses on the relative size of a response. So we can say that star scientists have an elastic migration response to state tax changes.

Right now, the Kansas legislature is debating whether to raise taxes because of a calamitous shortfall in tax revenue. I wonder if they need to be more patient.