Following is an excerpt from the conclusion of “Trends in New Jersey Migration: Housing, Employment and Taxation,” a report on the effects of migration on the state, released last week by the Policy Research Institute for the Region (PRIOR) at Princeton’s Woodrow Wilson School of Public and International Affairs. It was written by Cristobal Young and Charles Varner, graduate students at the department of sociology, and Douglas Massey, Woodrow Wilson School professor of sociology and public affairs

Out-migration in New Jersey: it is more a symptom of economic prosperity than decline. Indeed, the long-term economic position of New Jersey remains very strong. Per capita incomes in the state rose dramatically, relative to the country as a whole, during the 1980s, from 113% in 1979 to 127% in 1989 (see Graph 8). New Jersey has since then held its position as an extremely high income state, despite almost two decades of continuous net domestic out-migration.

With economic decline and the disappearance of jobs (as seen in Detroit), regions experience three basic problems: high unemployment, falling property values, and out-migration led by high-skilled workers. The pattern unfolds in the following way. As the economy declines, wages fall and people lose their jobs.

Skilled workers leave the region in search of better work opportunities. This leaves an abundant supply of cheap housing. Low-cost housing, in turn, tends to draw in lower-income migrants-low-skilled workers and those less attached to the labor market. In short, the Detroit model of out-migration is characterized by 1) falling wages and high unemployment, 2) declining property values and lower rents, and 3) net in-flows of people with less education and/or low labor force participation (Glaser and Gyourko 2005).

In contrast, New Jersey’s out-migration is characterized by 1) a state economy with high and rising incomes and below-average unemployment, 2) extremely expensive and rapidly appreciating housing, and 3) net in-flows of people with advanced education. All these are signs that the growing affluence of New Jersey is pushing out low-income individuals who are unable to afford the high cost of living.

Costs and benefits. One recent report suggested out-migration “has sizable and growing economic and fiscal implications” (Hughes et al. 2007:21). The report estimated the total loss of state income and sales taxes due to net out-flows at $539 million in 2005, and the loss of income at nearly $2 billion.

This approach of looking at “outflows of income” is incorrect and misleading. When people move away from New Jersey and earn income elsewhere, this might appear as an “outflow of income” or a “loss” to New Jersey. However, outmigration also produces new job vacancies, and fewer people competing for local employment.

In general, out-migrants leave their job to find new employment elsewhere. They do not take their jobs with them. This also means that migrants do not take their flow of income with them when they leave; rather, they find new sources of income in other states. This becomes a vacancy that is now available for someone else in New Jersey. Out-migration of workers or job-seekers does not mean losses of jobs or income.

A similar assessment holds true for housing and living costs. When people move away, they do not simply leave their jobs behind – they also leave houses and apartments, which ultimately help bring down (or ease the upward pressure on) the cost of housing in this state. In a state where housing prices have risen 294% this decade, some outmigration is not surprising, and indeed helpful from the perspective of affordability.

In short, the $2 billion income loss reported by Hughes et al (2007) largely reflects a misunderstanding of the migration process. To look at actual income losses to New Jersey, one must look at the migration of employers and jobs (income-earning positions), not the migration of workers and job seekers.

Fiscal Impact. The fiscal impact for the state government is similarly complicated by the fact that most of the “income losses” from migration are illusory. An out-migration of employers and jobs would create significant tax losses for the state government. However, an outflow of labor supply does not — assuming that the new job vacancies get filled reasonably quickly.

Moreover, it is not clear that simple population growth is beneficial to state finances. People not only pay taxes, but also use government services and public resources. To count out-migration as a fiscal loss, one must assume that New Jersey yields a large “surplus revenue” or “profit” on additional residents.

With a very high population density and an aging public infrastructure, it is quite possible that the state government is facing diseconomies of scale. In other words, a population surge might create more challenges for the state government than net outmigration.

Given that New Jersey is “exporting” some of its unemployment problem, it is also likely exporting some of its fiscal problems. This is of no clear benefit to the country overall, but it does likely benefit New Jersey state finances. If there had been no net out-migration since 2001, New Jersey’s population would be over 9 million today (instead of 8.7 million). Indeed, if there had been no net out-migration since 1991, the population would be almost 9.5 million.

The disproportionate impact of the wealthy. The simple demographics of migration, however, only begin to shed light on state finances. The bulk of state tax revenues are paid by the top 10% of income earners. The migration patterns of the “bottom” 90% of the New Jersey population have relatively less impact on state finances. This is especially true for the poorest 20% of income earners, who account for almost all of the net outmigration.

A person earning $20,000 per year pays about $280 in state income tax. A person earning $1 million pays almost $75,000 in tax. In short, when one millionaire moves away, the tax impact is equivalent to about 266 poor people moving away.

The half-millionaire tax.The trend in net out-migration among those earning more than $500,000 per year appears to be consistent with a small causal effect of the new tax bracket.

We estimated that net out-migration in this income bracket rose by about 350 people (or by about 0.8% of New Jersey’s half-millionaires) after the tax was introduced. This is a small, but noticeable, effect. If net out-migration had stayed the same for this group, state income tax revenues would be about $38 million higher each year. This is an upper-bound estimate of foregone revenues.

As we have noted, however, the new tax bracket has generated an average of $895 million per year in revenues. In short, the “half-millionaire tax,” at least in New Jersey, appears to be an effective and efficient revenue-generation mechanism, having little effect on migration patterns among half-millionaire households.

Read the full report at economy-Final-(2).pdf

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