Nebraska is losing taxpayers. See where they’re moving.
When taxpayers vote with their feet, policymakers should listen.
Nebraska endured one of the nation’s largest migration-caused losses of income between 2019 and 2020, according to taxpayer migration data released by the Internal Revenue Service. Nebraska’s net loss of annual income due to outmigration was nearly $500 million.
The Wall Street Journal described the new data as showing “The Great Pandemic Wealth Migration.” However, given the timeline for when the tax returns were filed, the data more particularly reflects pre-pandemic trends, and perhaps the emerging impact of enhanced migration incentives due to the federal State and Local Tax deduction cap (or SALT), with only some of the pandemic impact on migration.
The first 10-11 months of data (roughly April 15, 2019 – March 1, 2020) occurred during the robust economic growth that preceded the pandemic.
The last 4-5 months of data, covering roughly March 1, 2020 through July 15, 2020 (taxpayers had three extra months to file their taxes in 2020 due to the emergency), is when Americans universally understood and experienced the extreme disruption of the pandemic. Undoubtedly, the pandemic sped up some Americans’ moves, slowed down others’ moves, and redirected still other Americans to seek temporary refuge in a place that was not a long-term relocation.
IRS taxpayer migration data is considered the gold standard for taxpayer migration analysis. The publicly-provided data captures the movements of everyone who files a tax return along with their dependents and income. For example, if a taxpayer files a federal tax return from Oregon one year, and then from Idaho the next year, the taxpayer and his or her dependents and income are assumed to have migrated from Oregon to Idaho.
Eventually, this same type of data will tell fascinating stories about what occurred in the later stages of the pandemic.
Nebraska’s 2019-2020 migration data
Nebraska experienced a net loss of 2,303 tax returns representing 4,218 people (tax filers plus their dependents) between 2019 and 2020. This resulted in a net loss of nearly $500 million of annual adjusted gross income. Nebraska’s income loss is equal to 0.9% of Nebraska’s 2019 AGI. Only New York (-2.5%), Illinois (-1.9%), Alaska (-1.3%), California (-1.2%) and North Dakota (-1.0%) lost a greater portion of annual state AGI due to interstate migration between 2019 and 2020. By comparison, Idaho (+4.2%), Wyoming (+4.0%), Montana (+3.4%), Florida (+3.3%) and South Carolina (+2.7%) led states for the largest portion of AGI gained as a result of taxpayer migration. The following graphic, originally created at wirepoints.org, shows the states that won and lost income due to migration between states.
Nebraska’s migration gains and losses varied widely across states. For example, Nebraska lost $318 million in annual income to Florida (at a stunning rate of $650,000 per net lost tax return), while Nebraska gained $15 million in annual income from each California and New York. In general, Nebraska experienced net gains from high-tax states like California, New York, and Illinois, and experienced net losses to low-tax Sunbelt and Mountain West states. Here is a table displaying the overall gains and losses among all states.
Considering surrounding states, Nebraska gained income from Wyoming and North Dakota, both low-tax states that have cyclical energy-driven economies. Nebraska lost moderate amounts of income to Iowa, Kansas, Colorado, and South Dakota, and lost a significant amount of income to Missouri. In fact, Missouri ranked #4 among states for gaining people and income from Nebraska. The graphic below shades states based upon whether they gained or lost income with Nebraska.
Finally, Nebraska has consistently lost taxpayers and income, on net, to other states. The only year when Nebraska gained population from other states was in 2010, when overall migration rates were low due to a recession.
These results should be analyzed in greater detail before final conclusions are determined about the meaning of Nebraska’s outmigration losses. For example, while Nebraska loses more income to Florida than to any other state, the same is true for many states that lose older, higher-income retirees to Florida. Yet states are also losing young workers to Florida, too. In analyzing Nebraska’s competitiveness, it is more relevant to look at the migration of working age adults between Nebraska and other states rather than looking at the sun-bound moves of retirees.
Lessons from migration
Nebraska policymakers ought to discern lessons from the new migration data. It is clear that Nebraska loses a meaningful amount of residents and income to other states. However, policymakers should weigh migration causes that are under their control versus ones that are not.
Some examples of factors that are beyond the direct control of policymakers:
- Air conditioning still drives migration. Some Nebraska out-migrants are following the generations-old path of Americans heading from colder to warmer climates. This trend began with the commercialization of air conditioning. Given this long-term trend, it is no surprise that Nebraska’s largest losses are to Florida, Arizona, and Texas. Air conditioning turned these previously unattractive summertime furnaces into highly-desired locales. Migration patterns are still redistributing Americans to these areas. On the other hand, these losses should not be completely ignored because Florida, Arizona, and Texas are also highly competitive states.
- Retirees like the beach and scenery. Related, some migration tells the story of retirees decamping to enjoy their retirement near a beach in warm places like Florida or the Carolinas. Ultimately, if someone wants to spend their retirement on a beach, that person will probably leave Nebraska. The same is true for those who seek mountain vistas and ski slopes.
- Regional specialization often overcomes policy impact. Certain areas of the country will draw talent from Nebraska regardless of policy factors. Indeed, despite California being uncompetitive across multiple policy factors, Silicon Valley attracts top software engineering and computer science talent from around the world, including from Nebraska. On the other hand, the magnetism of Silicon Valley seems to have dissipated due to California’s COVID governance, combined with the rise of remote work.
Factors that are out of policymaker control should incentivize policymakers to double down on what they can control. Nebraska should do everything it can to max out its value proposition by providing a great quality of life at a reasonable cost. Here are a few examples of opportunities for reform.
- Taxes (and SALT) take a bite. Taxes are the cost side of each government’s value proposition, and should be generated through low rates applied upon a broad base. Furthermore, the so-called SALT cap began to apply in 2018. The SALT cap effectively increases the “felt cost” of state and local taxation by capping its deductibility on federal returns. All else being equal, the SALT cap should increase outflows from states like Nebraska that have relatively high top income tax rates (6.84% in 2019) and high overall tax burdens.
- Institutions and government services matter. Taxes pay for state institutions and programs, making these assets the “benefit” side of each state’s value proposition to residents. Improvements in the quality of institutions and delivery of government services will improve the cost-benefit analysis for relocating to Nebraska. Education, public safety, infrastructure, and health care are a few key institutions and programs provided by state and local governments. High-quality, innovative services at a reasonable cost will make Nebraska more attractive.
- Housing costs are becoming acute. Americans have experienced unprecedented housing cost inflation over the last two years, putting home ownership out of reach for many. Nebraska could make its case to young relocating Americans by being a relatively lower-cost state with relatively more affordable housing if it enacts policies to increase the supply of housing and slow the rise of its cost.
- Growth drives gains. States with better economic growth gain more residents. There are a wide variety of state policies that drive economic growth and attract investments, including but not limited to taxes and regulations.
Nebraska’s gains and losses from migration tell thousands of stories of individual families and relocating workers. From these thousands of stories, policymakers should seek trends that they can impact over the long-term through improved public policies. Nebraska will never have Florida’s beachfront, but it can continue to work to create a highly competitive environment where families can find strong economic growth, low costs, and excellent government services.