Budget & Tax

Massachusetts study holds tax warning for Oklahoma

May 15, 2024

Ray Carter

As the governor and legislative leaders continue budget negotiations, income-tax rates remain a major source of contention.

Gov. Kevin Stitt and House lawmakers, led by House Speaker Charles McCall, have endorsed putting Oklahoma’s personal income tax on a path to zero. Under that plan, Oklahoma’s personal income-tax rate would be reduced by a quarter-point every time the state has a surplus of $400 million or more.

The state’s top tax rate is currently 4.75 percent.

Opponents have argued for maintaining the current tax rate and boosting state spending in various areas instead.

But a new report from Massachusetts provides a significant warning for lawmakers who prioritize government spending over income-tax cuts.

Massachusetts has experienced an accelerating pace of net outmigration despite ranking high in areas such as education and health care. And it is losing a disproportionate share of population to states that have low or no personal income tax.

The “Massachusetts Outmigration Study,” released by Boston University, found that net outmigration from Massachusetts “is accelerating at an alarming rate” and income-tax rates are one of the top three drivers behind that trend.

The ripple effect of that outmigration is seen in the financial loss of billions of dollars in adjusted gross income and associated state income tax collections. Put simply, higher income-tax rates are translating into lower tax collections.

Since 2013, net outmigration in Massachusetts has increased 1,100 percent.

The state lost $4.3 billion in adjusted gross income due to net outmigration in 2020-2021 alone, which translated into a loss of $213.7 million in income tax revenue.

Since 2011, Massachusetts has lost $821 million in income-tax revenue as the result of outmigration.

By 2030, the report estimates that net outmigration could cost Massachusetts $19.2 billion in adjusted gross income and $961 million in lost income taxes per year.

And total tax losses are likely much greater because the study did not calculate lost sales tax, capital gains tax, property tax, and inheritance tax collections caused by net outmigration.

Of the top 11 states where former Massachusetts residents fled, 100 percent had lower income taxes, according to the report. Those states proved more attractive to former Massachusetts residents even though only 18 percent of the other states scored higher on quality of education, and none scored higher on healthcare quality, than Massachusetts.

The report found that Massachusetts’ workforce exodus is “broad, spanning the 24 to 64 age brackets,” and includes many higher-income earners along with working-class families.

Over the last decade, the report noted that the top five states drawing former Massachusetts residents have been Florida, New Hampshire, Maine, North Carolina, and Texas.

Of those five states, four have lower tax rates than Oklahoma. Texas and Florida have no personal income tax. New Hampshire does not levy a personal income tax except for a 3-percent tax on interest and dividends income. North Carolina’s current top rate is 4.5 percent, compared to Oklahoma’s top rate of 4.75 percent.

Furthermore, North Carolina provides for a standard deduction of $25,500 for a married couple, which is more generous than Oklahoma.

Stitt and House leaders have argued for changing Oklahoma’s income-tax system to a flat tax that kicks in on income above $13,350 for single filers or $27,100 for joint filers, heads of households, and qualifying widowers.

Currently, Oklahoma’s top personal income tax rate is imposed on those with incomes of $7,200 for single filers and $12,200 for joint filers and lower tax rates are imposed for those with incomes below those thresholds.

The Boston University report includes a “12 Myths” section. Among the myths identified by researchers is the argument that high-income households “show a lower rate of outmigration than other income groups,” that Massachusetts’ “high quality of healthcare, regardless of cost, is a strength and helps in population retention,” that state tax rates “don’t have significant impact on where high-income households choose to live,” and that future net outmigration “won’t materially impact state income tax collection or weaken economic prospects.”

The Massachusetts outmigration report, with its heavy emphasis on the importance of lower personal income taxes, comes as Oklahoma is falling behind in the tax race despite having lowered its top rate two years ago.

According to the Tax Foundation, at the start of 2024 three states bordering Oklahoma had lower income tax rates than Oklahoma, including no-income tax Texas, Arkansas (4.4 percent), and Colorado (4.4 percent).

Neighboring Missouri’s top rate of 4.8 percent was only marginally higher than Oklahoma’s 4.75 percent.

Among states bordering Oklahoma, only Kansas (5.7 percent) and New Mexico (5.9 percent) had significantly higher personal income-tax rates.