Economists are not the only people who abuse the assumption of “all other things being equal.” Just read the letters to the editor. This week, a reader proclaimed her intent to move to Wyoming because of its low taxes, state budget surplus and freedom — something she asserted is “missing in Minnesota.”
Her arguments depended as much on this “ceteris paribus” assumption as the purposefully simplistic theories in any introductory economics text. Yet such arguments are the ones most commonly heard in debates over state tax levels.
She is certainly correct that most people prefer to pay less in taxes. She was also correct that some surveys rank Wyoming’s quality of life near Minnesota’s. Her description of Wyoming’s fiscal situation – no income tax, low property taxes and a budget surplus – is correct, although she failed to note the role high energy prices play in a resource-dependent state like Wyoming.
Unfortunately for her argument, these differentials are not new. Forty years ago, Minnesota also had higher taxes than Wyoming, both of the Dakotas and Montana. There were plenty of incentives for over-taxed, oppressed Minnesotans to load up and head west.
But something funny happened: Minnesota’s population continued to grow strongly over time. Despite low taxes, clean air, relatively good schools and low crime, most of the Great Plains states to the west of us have grown more slowly.
Moreover, despite cheap labor and favorable business climates, the northern Great Plains experienced no boom in manufacturing, research, design or high-tech services.
Indeed, more residents of the Dakotas and Wyoming move to higher-taxed locations like the Twin Cities or Denver than vice versa.
Moreover, after-tax incomes in low-tax utopias like Wyoming or South Dakota continue to lag those of Minnesota.
Coincidentally, the same is true for employment growth. Jobs and earnings in Minnesota continue to grow faster than in low-tax states to our immediate west or in the low-wage paradises of the Deep South.
Tax levels are certainly not irrelevant to where people choose to live or where businesses choose to expand.
These decisions are, however, complex ones in which households and business owners weigh myriad factors. For whatever reasons – higher after-tax incomes, abundant job opportunities, proximity to big research universities, major league sports, award winning theaters and museums, good restaurants, business infrastructure, better education and social services – the historical trend of the last half-century is for net migrations of people and jobs to high-tax, high-service states like Minnesota and away from the western Dakotas, Wyoming and the eastern two-thirds of Montana.
This is not an argument about any specific measure before the Legislature. Rather, it is a reminder that decisions about where businesses, jobs and people locate are driven by many factors, of which tax levels are only one.
© 2005 Edward Lotterman
Chanarambie Consulting, Inc.