Oklahoma migration may hold tax lessons
April 12, 2019
New research by Federal Reserve Bank officials shows “more people moved out of Oklahoma to live in other parts of the United States than moved in” during each of the past three years, reversing a prior trend of population growth. Those three years coincided not only with an oil bust and related state recession, but also with legislative approval of more than $1 billion in new taxes and other revenue measures.
Jonathan Williams, chief economist for the free-market American Legislative Exchange Council (ALEC), says the latter may have more to do with outmigration than what Oklahoma policymakers may want to admit.
“The last two years of tax increases have been a toxic mix that certainly has contributed to the outmigration issue that Oklahoma faces,” Williams said.
New research by Chad Wilkerson, vice president and Oklahoma City Branch executive of the Federal Reserve Bank of Kansas City, and research associate Courtney Shupert, found outmigration in the last three years “reversed a 10-year trend—from 2005 to 2015—in which the state attracted more new U.S. residents each year than it lost.” The outflow reduced overall state population growth to the slowest rate since 1990.
Williams does not dismiss the oil bust as a huge factor. A recent report from the State Chamber Research Foundation showed the oil bust resulted in the direct loss of 21,500 energy jobs and a $22.1 billion decline in GDP in Oklahoma’s oil and gas sector. The Chamber report estimated the ripple effects may have created an overall $51.8 billion contraction in state GDP compared to pre-bust forecasts.
But Williams said a “couple of decades’ research” also shows taxes affect migration.
“We know that all taxes matter to growth,” Williams said. “We know that some taxes matter more than others, like income taxes or any capital-based tax that are the biggest problems for economic growth. And we absolutely know that taxes drive migration, both in and out of state, and that the high-tax states and the states that have been raising taxes dramatically have suffered the migration consequences as job-creators flee and set up shop in other states.”
He also noted “not every region is created equal.”
“If Oklahoma was based in the Northeast, let’s say, it would probably be a huge in-migration state even with the tax increases just because of the relative size of the burden in those other neighboring states,” Williams said. “They would look at Oklahoma and say, ‘This is a good value for our dollars. We’re going to go and live here and set up our business in Oklahoma.’ Unfortunately for Oklahoma, that’s not the case. When you have a no-income-tax state like Texas on your southern border and other relatively low-tax states in the region to compete with, that makes it even more dangerous for states like Oklahoma to raise taxes.”
As a percentage of income, he said Oklahoma’s tax hikes stand out.
“It turns out there’s only a handful of states in America that raised taxes more than Oklahoma did over the last two legislative sessions,” Williams said.
However, Oklahoma lawmakers avoided raising what Williams says are the most economically destructive taxes. Lawmakers did not raise the top income-tax rate, now set at 5 percent. And they resisted calls to repeal a capital-gains tax break for owners of Oklahoma property, which farmers and ranchers said was vital to their businesses.
“If you want a silver lining, it is that at least the Legislature didn’t raise the most damaging source of revenue for the state, and that is any capital-based or income tax,” Williams said.
Rodd Moesel, president of the Oklahoma Farm Bureau, said preservation of the capital-gains tax break was “huge for us,” but said he could not say with certainty its continuance stemmed the loss of rural population in Oklahoma. The Federal Reserve data, published in the “Oklahoma Economist,” showed the “steepest drop in net domestic migration in recent years has been in non-metro areas” with western Oklahoma particularly hard hit.
But had lawmakers raised the capital-gains tax, it would have been a new expense added on top of other financial strains for Oklahoma agriculture producers.
“Commodity prices are 55 percent of what they were four years ago, plus our guys are dealing with interest rates that have approximately doubled, even though they’re still at historically low rates,” Moesel said.
The Federal Reserve research showed Oklahoma’s population “grew faster than the nation from 2006 to 2010” and that the state population continued to grow at about the national rate through 2015. The report also found that GDP in Oklahoma “grew faster than the nation in most years from 2005 to 2015.”
The 2006 to 2010 period is also the time when the Oklahoma Legislature began lowering the state income tax rate from 6.65 percent to the current rate of 5 percent. Most of the income-tax reductions were in place before 2010.
Williams said the apparent correlation between population growth and lower taxes is not a coincidence, although other factors certainly played a role, such as the fracking revolution in the oil industry.
“It’s hard to argue with the success of what Oklahoma saw,” Williams said. “Now, what percentage of that success was coming from that industry versus what was attributable to tax cuts, that’s the debate for academics to have.”
The Federal Reserve report noted that “sizable cuts to the Oklahoma state budget” occurred in 2016 and 2017, and said those cuts “may have exacerbated migration trends.” But the report also revealed that Arizona was one of two states “gaining the most from Oklahoma’s net outflows of residents in 2016 and 2017.”
Notably, Arizona was the site of mass teacher strikes last year, just like Oklahoma. In both states, activists declared school systems were severely underfunded.
Rather than people moving to a state based on a perception of greater government spending, Williams thinks there’s another explanation for Arizona’s appeal to former Oklahomans.
“Arizona’s tax system is generally quite pro-growth,” Williams said. “Obviously, when it comes to personal and corporate income taxes, they’re below the national average on both of those. And generally, Arizona has had a very free-market, free-enterprise outlook on policy for quite some time. And I think it certainly paid dividends.”