When it comes to economic development in blue states like Rhode Island, politicians prefer to focus on subjects like “quality of life.” A recent study published in the National Bureau of Economic Research discussing the impact state taxes have on the migration of top earners should direct attention back to the basics of economic growth.
A few years ago, with the Rhode Island struggling to recover from the recession, legislators mandated an economic development plan. What the state wound up with was a local application of the federal Department of Housing and Urban Development’s six “livability principles,” with the lead benefit, according to then-governor Lincoln Chafee (D), being “pride and appreciation” of local environment, architecture, and culture.
More recently, the speaker of the Rhode Island House, Nicholas Mattiello (D), has backed the expensive idea of moving the Pawsox, the state’s minor league baseball franchise, a few miles down the road, from Pawtucket to Providence. The team has threatened to move across state lines, and advocates like Mattiello see it as part of the state’s culture.
Economists agree that quality of life, geography, and other factors obviously affect an economy, and the NBER report’s authors, Enrico Moretti and Daniel Wilson from the University of California at Berkeley and the Federal Reserve Bank of San Francisco, respectively, acknowledge that tax rates aren’t everything.
Their study specifically looks at “star scientists,” those in the top 5 percent for the number of patents that they file. Moretti and Wilson were not able to predict numbers of star scientists based purely on tax rates. “The effect” of tax rates, they write, “is swamped by all the other differences across states.”
Pointing to that concession, however, is a long way from figuring out which non-tax thing should be changed and, even more, finding politicians to pick the right direction. By contrast, according to the economists, reducing personal income and corporate income tax rates has “large, stable, and precisely estimated effects” on star scientists’ decisions about where to locate.