The Effect of State Taxes on the Geographical Location of Top Earners: Evidence from Star Scientists

We looked at a preliminary version of this paper but here is the final version. Moretti on the elasticity of mobility of human talent in the face of high tax rates. Findings should be useful.

"...We focus on the locational outcomes of star scientists, defined as scientists—in the private sector as well as academia and government—with patent counts in the top 5 percent of the distribution.....We define star inventors, in a given year, as those who are at or above the ninety-fifth percentile in number of patents over the past ten years. In other words, stars are exceptionally prolific patenters.....The state pair with the most bilateral flows over this decade was California-Texas; 26 star scientists per year moved from Texas to California and 25 per year moved from California to Texas. Close behind was California-Massachusetts, with 25 per year moving from Massachusetts to California and 24 moving in the opposite direction....We uncover large, stable, and precisely estimated effects of personal and corporate taxes on star scientists’ migration patterns. The long-run elasticity of mobility relative to taxes is 1.7 for personal income taxes, 1.8 for state corporate income tax, and 1.6 for the investment tax credit. In terms of stocks, our elasticities imply that if the net-of-tax rate increases in a state (holding other states’ rates constant), due to a cut in the personal income average tax rate or the corporate tax, the stock of scientists in the state will rise by 0.4 or 0.42 percent per year for as long as the increase in the net-of-tax rate differential lasts. These elasticities are economically large and significantly larger than the conventional labor supply elasticity. The effect on mobility is small in the short run, and tends to grow over time.While we can’t rule out that our estimates are biased by unobserved demand or supply shocks, a number of additional pieces of evidence lend credibility to a causal interpretation of our estimates. First, we find no evidence of pretrends: changes in mobility follow changes in taxes and do not to precede them. Second, the effect of corporate income taxes is concentrated among private sector inventors: no effect is found on academic and government researchers. Third, corporate taxes only matter in states where the wage bill enters the state’s formula for apportioning multistate income. No effect is found in states that apportion income based only on sales (in which case labor’s location has little or no effect on the tax bill). We also find no evidence that changes in state taxes are correlated with changes in the fortunes of local firms in the innovation sector in the years leading up to the tax change. Finally, within-firm evidence suggests that multistate firms adjust the share of employment in each state as a function of business taxes. Overall, we conclude that state taxes have significant effect on the geographical location of star scientists and possibly other highly skilled workers. While there are many other factors that drive when innovative individual and innovative companies decide to locate, there are enough firms and workers on the margin that relative taxes matter....Of course, taxes are not the only factor that can determine the location of star scientists. Indeed, we find a limited cross-sectional relationship between state taxes and number of star scientists in a state as the effect is swamped by all the other differences across states. California, for example, has relatively high taxes throughout our sample period, but it is also attractive to scientists because of the historical presence of innovation clusters like Silicon Valley and the San Diego biotech cluster....As an illustration, our estimates imply that the effect of New York cutting its statutory personal income tax rate on the top 1 percent of earners from 7.5 percent to 6.85 percent in 2006 was to increase the net inflow of star scientists to the state by about 3 per year, which is a sizable effect over time. Over a ten-year period, for instance, this implies an addition of 30 to New York’s stock of star scientists—a 2.6 percent increase...."

Enrico Moretti and Daniel Wilson, "The Effect of State Taxes on the Geographical Location of Top Earners: Evidence from Star Scientists,"American Economic Review, 2017, https://eml.berkeley.edu//~moretti/taxes.pdf