Are High Taxes Restricting Indiana’s Growth?

July 9, 2007

521 words
Indiana Writers Group column for July 11 and thereafter
(Digital mug shot available on request)

By John Tatom

The “Hoosier Comeback” program sponsored by the Indiana Economic Development Corporation is part of a strategy to boost economic growth, in this case through increasing the quantity and quality of available human resources. The plan envisions subsidies to encourage the return of former residents.

A broader effort, though, could more usefully focus our energies in recruiting others to migrate to Indiana or inducing existing residents to stay.

Indiana’s population growth has been weak relative to the rest of the country, though not as weak as in the 1970s and 1980s. It is set to return to a much weaker pace, however, according to the US Census Bureau.

In 1972-87, Indiana’s population growth rate was only 0.2 percent per year, well below the U.S. pace of one percent per year. In some years, population even fell (1980-1983 and 1986). Subsequently, Indiana’s population grew at a 0.8 percent average annual rate from 1987 to 2005, closer to, but still below, the national pace of 1.2 percent per year. Over the next 25 years, U.S. population growth is expected to slow (to 0.8 percent per year) and Indiana’s is expected to fall back more sharply (to 0.3 percent per year).

Such slow growth in population and the workforce will curtail the pace of expansion of overall output and income in the U.S. and all the more so in Indiana.  

An economic hypothesis says that consumers vote with their feet, sorting themselves into political jurisdictions based on their preferences for public sector goods and services. This hypothesis has found strong statistical support in a variety of contexts and has become a critical feature of local government expenditure and tax analysis.  

A 2001 study, for example, provides evidence that the elderly are attracted to move to states with sales-tax-exempt food, low personal income tax rates, low death taxes and low welfare spending. A study last year cited evidence of large net out-migration in Michigan recently due to the rising tax burden there.  

Data gathered by the Tax Foundation for the 50 states for 2005 and in-migration rates prepared by the U.S. Bureau of the Census for 2005 provide more evidence of consumers voting with their feet.* While there are many other factors that affect in-migration, the negative relation between the state and local tax rate and in-migration is apparent: Each one-percentage-point rise in the tax rate is shown to reduce the in-migration rate by 0.41 percentage points.

In Indiana, the state and local tax rate rose from 10.0 percent to 10.6 percent between 2000 and 2005. This increased tax could reduce the in-migration rate by 0.24 percentage points or half the decline in population growth for the 2005-30 period projected by the Census Bureau. Placed on top of the decline already projected, this would bring the population growth rate in Indiana to about 0.1 percent per year from 2005 to 2030.

Again, if people vote with their feet, then governments that either raise taxes or reduce government programs discourage residency and economic activity in their jurisdictions. On the other hand, Indiana could attract back more former residents, or keep those it has, by lowering the tax burden.

* Editors: The in-migration rate is measured by the number of residents over one year of age who did not live in a state in the prior year divided by the current population.; the tax rate includes all state and local taxes as a percent of net state product.

  John A. Tatom, an adjunct scholar of the Indiana Policy Review, is director of research at Networks Financial Institute in Indianapolis, part of Indiana State University, where he is also associate professor of finance. Earlier he was head of Country Risk and Limit Control at UBS in Zurich. He is a former policy adviser and research official at the Federal Reserve Bank of St. Louis.


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