High state taxes on prosperous individuals and corporations keep star scientists from relocating to some states, according to a new working paper published by the National Bureau of Economic Research. The paper gives new evidence for the argument that lower taxes make some states more attractive to employers and highly-skilled workers.
The paper was authored by Enrico Moretti with the University of California, Berkeley, and Daniel Wilson, with the Federal Reserve Bank of California. Moretti and Wilson examined United States patents filed between 1976 and 2010 and other data to reach their conclusions.
Anecdotally, one might expect state taxes to have little to do with scientists. For example, California has relatively high corporate and individual income tax rates, but Silicon Valley is still full of talented scientists.
While some scientists still make their way to Silicon Valley, Moretti and Wilson’s research shows that high taxes are still an important factor in relocation. Their research actually tried to control for outside factors that affect relocation, such as weather or the prestige of Silicon Valley, to single out the effect of taxes.
“While there are many other factors that drive when innovative individuals and innovative companies decide to locate, there are enough firms and workers on the margin that relative taxes matter,” Moretti and Wilson wrote. “This previously unrecognized cost of high taxes should be taken into consideration by local policymakers when deciding whom to tax and how much to tax.”
Moretti and Wilson found star scientists would move according to the marginal tax rate paid by the 99th percentile of income, but changes in taxation for people at the median income did not affect star scientists. As time goes on, the effect of state taxes on relocation increases.
Validating their conclusion, Moretti and Wilson said that changes in movement trends followed tax changes. Had movement trend changes preceded tax changes, it would imply something else was causing scientists and their companies to move, and that the tax change was coincidental.
Further confirming their conclusion, Moretti and Wilson found that academic and government researchers were unaffected by corporate income taxes, unlike private sector inventors.
Two alternative explanations for the trend, they said, would be that state legislatures tend to enact other pro-business policies that attract scientists at the same time as they cut taxes; or that scientists and their companies might avoid states in the midst of local recessions, during which taxes are coincidentally raised on higher earners to make up lost revenue.
