Where Taxes Matter, and Where They Don’t

Don’t you hate posts about the “Two Americas”? Get ready for another.

This is a follow-up to my recent posts on state income taxes. Here I’ll argue that the supply-side argument is gradually weakening at the state level. But first let’s dispose of that silly liberal argument that taxes don’t matter. Here are some facts:

1. Liberals favor really high MTRs on the rich.

2. No state has a top income tax MTR of 20%. No state even has a 15% bracket. And the only 2 with at least 10% top rates just so happen to be the only two places in America with decent weather (and hence a captive audience).

3. Liberals control the government in a number of states.

4. Ergo, liberals are terrified of the incentive effects of taxes, no matter how much they mock Art Laffer. They secretly agree with Gov. Brownback.

But here I’d like to make the opposite argument; the case for supply-side effects is gradually weakening. In a recent post I said:

In the old days high taxes would make people and companies move to other states. Commodity industries are highly competitive on price. That’s Kansas and Louisiana. But the new economy in places like Manhattan and Boston and DC and Silicon Valley has companies with lots of market power, and people so rich they care more about amenities than a few extra bucks. So that works in favor of the progressives, but not yet in all 50 states.

We’ve looked at the Iowa/South Dakota area, now lets look at population growth in New Hampshire and Massachusetts, and the amount by which New Hampshire outpaces the Bay State:

 Period    New Hampshire    Massachusetts    Difference
 1960-70  21.5%  10.5%  +11%
 1970-80  24.8%  0.8%  +24.0%
 1980-90  20.5%  4.9%  +15.6%
 1990-2000  11.4%  5.5%  +5.9%
 2000-10  6.5%  3.1%  +3.4%
 2010-14 0.8% 2.9% -2.1%


The late 1970s saw the famous tax revolts (Prop 13, Prop 2 1/2, etc.) People were fleeing “Taxachusetts” for New Hampshire. But that period is over, and Massachusetts (especially Boston) is now growing faster. Perhaps this represents the concentration in the newer info-tech jobs in the big cities. But I think it’s more than that. New Hampshire also has lots of high tech jobs. I think it reflects the fact that highly educated Millennials are becoming more fond of urban living, and find a house in the suburbs to be boring.

But not all of them. Some still do prefer suburban living, and when you combine that with the strict zoning laws in many “blue” cities, you end up with a more complicated picture. There are now, yes . . . here it comes . . . TWO AMERICAS!!

InfoAmerica and CommodityAmerica. InfoAmerica in concentrated in the big cities of the blue states (New York, Boston, DC, LA, the Bay Area, Seattle). In those places, taxes are less important, because it’s all about the amenities. Infotech workers are willing to pay modestly higher rates, even in states (like California) where the higher taxes don’t produce good services.

CommodityAmerica is (fittingly) more materialistic (although oddly also more religious.) These people prefer bigger cars and big suburban homes. They aren’t interested in edgy urban areas. They are more strongly incentivized by lower taxes. Texas is the undisputed King of CommodityAmerica. Texas has a reputation for sucking people in from high tax New York and California, but I believe on closer inspection they are actually sucking in more people from CommodityAmerica states with 5%, 6% and 7% top rates (and the same cheap housing as Texas.) All of the states close to Texas are not just growing far slower than Texas; they are all growing slower than the national average.

Of course there are exceptions. Austin is Infotech and low tax, and is (therefore) the fastest growing city in America. Buffalo is in high tax New York State, but is part of CommodityAmerica. Is there anyone left in Buffalo? I haven’t been there recently. BTW, there’s a reason Buffalo has an NFL team and Austin doesn’t; Buffalo was once one of America’s great cities.

About Scott Sumner 492 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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