Over the past few decades, states with no income tax have significantly outpaced states with the highest income taxes in population growth and therefore in economic growth. Conservatives like to point to this as an argument for cutting state income taxes.
But states in these groups have confounding similarities. For example, the highest income-tax states (a group dominated by California and New York) tend to have restrictive development policies and resultantly high housing costs; no-income-tax states (a group dominated by Florida and Texas) tend to have much easier development rules and lower home prices.
An analysis by Jed Kolko, the chief economist at Trulia, a real estate data company, argues that the crucial driver of out-migration from California toward states like Texas is home prices, not taxes. He bases this argument on a few important findings. First, while California has significant net out-migration, it experiences very slight net in-migration by households making more than $200,000 a year. The biggest out-migration is by poor and middle-income cohorts. This is inconsistent with the theory that California drives rich people (or “job creators”) away with high top-income-tax rates.
Additionally, Kolko looks at the relationship between the California home price premium -- the difference between average home prices in the state and the national average -- and out-migration, finding that as home prices fell in California relative to the country, out-migration fell, too. A regression analysis showed that the home price gap was a much stronger predictor of out-migration in a given year than the difference in tax burden, though both mattered.
Conservatives and liberals both tend to have the wrong reactions when confronted with this analysis.
Conservatives tend to resist the housing analysis of interstate competition. They have a strong emotional attachment to the idea that blue states are punished for high tax rates. But this is also a story of blue-state public-policy failure. People move from California to Texas because Texas has a freer market in real estate that serves people better by providing more affordable housing.
And blue-state liberals tend to like the housing case because they think it gets them off the hook on the tax question. Maybe so, though all Kolko argues is that housing matters more, not that taxes don’t matter. But why doesn’t this finding spur liberals in places like California to demand housing market liberalization, so that middle-income people can afford to stay there?
These errors are not that hard to understand. The conservative economic agenda tends to be driven by wealthy people who would benefit a lot from lower taxes, rather than middle-class people who would benefit a lot from lower housing costs. And lots of conservatives fail to identify restrictive planning and zoning policies, driven by local governments, as big government in action.
Some liberals have a gut-level distrust of the idea of housing as a market good. They look around and see new condominium buildings springing up in neighborhoods where prices are rising sharply, misidentify the cause and conclude that allowing development causes prices to rise. As a result, they respond to housing-cost pressures with policies designed to prevent neighborhoods from changing -- rent control, restrictive zoning, historic preservation -- that only drive costs up further.
And many people all over the political spectrum mistakenly believe that high home prices are desirable in and of themselves. They have trouble processing the idea that California’s high home prices result from policy failure rather than policy success.
California really does have something to learn. Conservatives should figure out that they’re pushing the wrong Texas lesson. And liberals should start listening to the right one.
(Josh Barro is lead writer for the Ticker. E-mail him at email@example.com and follow him on Twitter.)