| January 5, 2012

Oklahoma Losing Taxpayers to No-Income-Tax States

As we pointed out in these pages in April 2010, migration data show that Oklahoma has become somewhat of a magnet in recent years. We found that, generally, people come to Oklahoma for lower taxes, fewer unions, more space, and more affordable housing.

Given that Oklahoma is considering reducing or eliminating its personal income tax, in this article we will delve into the role that income taxes play in Oklahoma’s migration patterns.

Internal Revenue Service migration data by state are useful in determining where out-migrants are going and where in-migrants are coming from. The IRS data are segmented by the number of taxpayers (a good proxy for households), the number of exemptions (a good proxy for people), and adjusted gross income (AGI, a good proxy for household income).

As shown in Chart 1, since 2005 Oklahoma has attracted more people than it has lost. The recent in-migration has more than erased the out-migration that occurred prior to 2005. As such, between 1995 and 2009, Oklahoma has seen a net in-migration of 8,141 households, 50,315 people, and $832 million.

Net Migration in Oklahoma

But Chart 1 is merely a top-level look at Oklahoma’s net migration. There are many subplots in the story. One of these subplots is the role of the income tax in migration patterns.

The way to explore this subplot is by comparing various characteristics of Oklahoma with those characteristics in the origin and destination states of migration

How the Income Tax Affects Oklahoma's Net Migration

In economic terms, migrants are expressing their “revealed preferences” by moving to another state more in line with their preferences and values. Table 1 compares Oklahoma’s income tax burden to that in states that have net in-migration into Oklahoma and the states that have net out-migration from Oklahoma.

Oklahoma’s average income tax burden (as a percent of private sector personal income) over the 1995 to 2009 time period was 3.52 percent. For states that have a net in-migration into Oklahoma, households came from states where income tax burdens were 2.1 percent lower (3.45 percent), the number of people was 0.7 percent lower (3.5 percent), and income was 1.4 percent higher (3.57 percent).* Overall, it appears that for in-migrants, Oklahoma’s income tax does not appear to be a major factor.

On the other hand, out-migrants are a different story altogether. Oklahoma households are moving to states where income tax burdens were a whopping 69.4 percent lower (1.1 percent). Clearly, Oklahomans are showing a preference for dramatically lower income tax burdens.

More specifically, as shown in Table 2, Oklahomans are showing a strong preference for states with no income tax. In fact, five of the nine states with no income tax enjoy net in-migration of Oklahoma households, and six of the nine states enjoy net in-migration of Oklahoma income. Overall, between 1995 and 2009, Oklahoma has lost 16,675 households, 20,824 people, and $1.5 billion in income to these no-income-tax states.

Oklahoma's Net Migration to States with No Income Tax

Of course, Texas accounts for the vast majority of this flight to income-tax-haven states. The close proximity to the Lone Star State makes it easy for departing Oklahomans to enjoy income-tax-free status. However, on a net income per household basis, Florida wins hands-down—with an average of $328,838 per out-migrating household!

Overall, this analysis shows that Oklahoma policymakers should pay close attention to their state’s no-income-tax competitors, especially Texas and Florida. Eliminating Oklahoma’s income tax would go a long way toward equalizing the playing field with these two states. Doing so would dramatically boost Oklahoma’s net in-migration rate by eliminating a major reason for Oklahomans, and their income, to leave.

Economists J. Scott Moody (M.A., George Mason University) and Wendy P. Warcholik (Ph.D., George Mason University) are OCPA research fellows.

*The values for the origin states are based on the weighted average of these states in proportion to their representation of total in-migration from Oklahoma, and vice versa.

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