Cutting Taxes on Pensions Won’t Keep Retirees from Moving to Other States

The argument that people move between states because of taxes is wildly overblown in contemporary state policy debates. Research on this issue is fairly clear: tax flight just doesn’t show up in carefully controlled studies.

But that hasn’t stopped the LePage administration from continuing to argue that Maine must cut personal and corporate income taxes and estate taxes to encourage people to live here. When asked recently by members of the Appropriations and Financial Affairs Committee to provide evidence to support the tax flight story, Governor LePage’s finance commissioner, Richard Rosen, resorted to anecdotes that begin along the lines of “If you talk to financial professionals who work for high net-worth individuals . . .” Commissioner Rosen failed to provide substantial evidence of tax flight and there’s a reason for that: most empirical research doesn’t support the idea of interstate tax flight. Even in studies that do find some statistically significant effect of taxes on interstate migration, the effect is small.[1]

One specific version of the governor’s tax flight argument cites the need to exempt retirees’ pension income from taxation in order to encourage them to retire in Maine. The Governor’s budget proposal would increase the amount of pension income exempt from income taxes from $10,000 to $35,000 over the next five years. It would also fully exempt retirement income from military pensions. These are costly proposals tax cuts that would mostly benefit more affluent retirees, since Social Security Retirement Income is already exempt from the state’s income tax.

Two economists from Reed College published an article in the National Tax Journal in 2012 entitled “No Country for Old Men (Or Women)- Do State Tax Policies Drive Away the Elderly.” Howard Gleckman over at the Tax Policy Center brought their article to my attention today. Based on thirty years of state income, migration, and tax data spanning the 1970 to 2000 period, a time when many states were experimenting with tax breaks targeted at retirees, the economists’ conclude:

Our results are overwhelming in their failure to reveal any consistent effect of state income tax breaks on elderly interstate migration.

Even if you don’t believe any of the academic literature on the tax flight issue, just look at the IRS migration statistics, which show that the flow of taxpayers from New Hampshire to Florida since 1993 has been even larger than the flow from Maine to Florida. New Hampshire has a very small personal income tax that does not apply at all to retirement income from pensions, IRAs, or 401Ks, and has no estate tax. But that clearly hasn’t stopped New Hampshire retirees from relocating to Florida. There’s no reason to expect Maine to be any different.



[1] See for example Jon Bakija and Joel Slemrod, “Do the Rich Flee from High State Taxes? Evidence from Federal Estate Tax Returns?” National Bureau of Economic Research Working Paper 10645, July 2004.