Illinois’ out-migration is being driven by the loss of prime working-age adults to other states. When Illinois makes itself unattractive for taxpayers and businesses, Illinoisans leave the local economy for states where job creation is stronger and public debts and property taxes are lower. The Land of Lincoln’s accelerating taxpayer loss contributes significantly to the state’s precarious financial position.
The effect of out-migration on Illinois finances
Out-migration leaves a low-growth tax base to fund growing government costs, debts and pension liabilities. Illinois’ unattractive business climate and failed governance comes with a hefty price. Due to the past 18 years of out-migration, Illinois has accumulated net losses of $47 billion in annual adjusted gross income and $8 billion in annual state and local tax revenue. Illinois’ financial situation will only improve when economic growth makes it easier for taxpayers to stay in Illinois.
Who is leaving
Recent migration research by the Illinois Policy Institute has revealed that Illinois’ out-migration is being led by the loss of prime working-age adults, ages 25-54.
- Bureau of Labor Statistics data from 2005 to 2015 show prime working-age cohorts in Illinois shrank by 290,000 due to out-migration over the decade, even after accounting for Illinois’ international immigration gains.
- Enriched IRS data from 2011 to 2014 show Illinois’ net migration losses are being led by young working-age adults. The taxpayers leaving fastest are ages 26 to 34, followed by taxpayers ages 35 to 44. Out-migration is accelerating most among taxpayers under 26 years old.
Factors driving out-migration
This report looks at the factors that make other states attractive in comparison with Illinois. Significant findings for policymakers include:
- Illinois households left for states where private-sector jobs growth was 339 percent higher over the 18-year period.
- Illinois households left for states where the per capita state debt burden was 86 percent lower over the 18-year period.
- Illinois households left for states where property taxes were 23 percent lower over the 18-year period.
Illinois’ status as an outlier on jobs growth, state debt and property taxes has worsened in recent years, putting the state in a precarious position and likely contributing to Illinois’ accelerating out-migration. The solution to Illinois’ out-migration problem is part and parcel of solving Illinois’ long-term financial troubles. Illinois needs more jobs so that a growing base of taxpayers can pay the bills.
Migrating from one U.S. state to another is the ultimate expression of “voting with your feet.” This study undertakes a thorough examination of Illinois’ migration patterns to better understand progress on important public policy issues. Key findings include the following:
- According to data from the Internal Revenue Service, between 1995 and 2013, Illinois suffered net out-migration every year with a total loss over the period of 485,137 taxpaying households representing 1,052,990 people. Losing these taxpayers is a serious blow to Illinois’ economy and government coffers.
- The top states to which people from Illinois move are Florida, Indiana, Texas, Wisconsin and Arizona.
- The top states that people move into Illinois from are Ohio, Michigan, New York, New Jersey and Pennsylvania. However, Illinois’ gains from Ohio and Michigan have reversed in recent years.
- The net income leaving the state averaged more than $2.4 billion per year, adjusted in 2015 dollars, between 1995 and 2013, for a total loss of $46.7 billion. Had this income stayed in Illinois, state and local governments would be collecting an estimated $8 billion in additional tax revenue per year.
- Of course, when a resident leaves, Illinois loses income and taxes not only for that one year but for all future years as well. Compounding these figures over the 19 years assessed in this study shows that the state has lost $451 billion in net income and $74 billion in state and local tax revenue, adjusted in 2015 dollars, due to out-migration.
- The loss of income is not just due to more people moving out than moving in, but also to out-migrants having higher incomes than in-migrants. Between 1995 and 2013, the average income of out-migrants was $66,745 in 2015 dollars, while the average income of in-migrants was $58,825 in 2015 dollars – a difference of $7,920.
- The reported income and tax losses of net out-migration should be considered the minimum loss, as they do not take into account the personal and business assets that may be sold in the years after the move. This is an especially important dynamic for migrants to no-income-tax states such as Florida and Texas (the No. 1 and No. 2 destination states, respectively, for Illinois taxpayer net out-migration).
- People, and their incomes, are most inclined to move where there is greater growth in private-sector jobs, taxes are lower (especially estate taxes), state debt burdens are lower, union membership is lower, population density is lower, the cost of living is lower, and the weather is warmer.
Measuring Illinois’ out-migration problem
The Internal Revenue Service provides an annual snapshot of taxpayer migration via tax returns, which offer a rich picture of migrants. The IRS has access to actual tax returns, a good proxy for the number of households; the number of exemptions per tax return, which is a good proxy for the number of people in the household; and their reported adjusted gross income, or AGI, which is a good proxy for household income.
Table 1a and Chart 1 show the aggregate migration data from the IRS for Illinois. In 2013 (the latest data available), 131,620 taxpayers left the state while 92,950 taxpayers entered the state – a net loss of 38,670 taxpayers. The in-migrating taxpayers represented 165,350 exemptions and $5.5 billion in AGI, while the out-migrating taxpayers represented 246,494 exemptions and $9.8 billion – a net loss of 81,144 exemptions and $4.1 billion in AGI.
Overall, for the entire time period between 1995 and 2013, Illinois lost 485,137 taxpayers (households), 1,052,990 exemptions (people) and $38.6 billion in AGI (income, nominal dollars). Of course, a dollar in 1995 was worth more than a dollar is today, so income must be adjusted for inflation. Putting AGI into 2015 dollars shows a much greater loss of income: $46.7 billion.
Where are the out-migrants going?
The IRS provides migrant data by state, which is useful in determining where out-migrants are going and where in-migrants are coming from. Tables 2a, 2b and 2c rank the net migration totals for the years 1995 to 2013 for households, people and income, respectively.
As shown in Table 2a, the top out-migrant states for households are Florida (74,576), Texas (50,594), California (46,632), Arizona (45,544) and Wisconsin (42,229). On the other hand, the top in-migrant states for households are Michigan (16,748), Ohio (12,626), Pennsylvania (3,118), New Jersey (1,578) and Connecticut (466). Overall, Illinois lost households to 41 states while gaining households from only nine states for the years considered.
As shown in Table 2b, the top out-migrant states for people are Florida (146,857), Indiana (122,169), Texas (119,530), Wisconsin (106,804) and Arizona (85,683). On the other hand, the top in-migrant states for people are Ohio (6,167), Michigan (3,602), New York (3,258), New Jersey (3,024) and Pennsylvania (1,065). Overall for the years considered, Illinois lost people to 42 states while gaining people from only eight states. It is interesting to note, however, that in the last several years Ohio and Michigan have reversed their flow of out-migration to Illinois.
As shown in Table 2c, the top out-migrant states for income (in 2015 dollars) are Florida ($11.6 billion), California ($4.7 billion), Arizona ($3.9 billion), Texas ($3.9 billion) and Wisconsin ($3 billion). On the other hand, the top in-migrant states for income are Ohio ($447 million), New Jersey ($149 million), North Dakota ($19 million), Delaware ($19 million) and Pennsylvania ($13 million). Overall, Illinois lost income to 44 states while gaining AGI from only six states for the years considered.
Why should policymakers worry about out-migration?
These out-migrants take their incomes and purchasing power with them when they leave. As shown in Table 1b, between 1995 and 2013, the total amount of income leaving the state was at least $46.7 billion in 2015 dollars. The greatest out-migration of income was in 2013 at $4.2 billion. In fact, as shown in Chart 2, the annual average out-migration of $8.1 billion exceeded the average in-migration of $5.6 billion by $2.5 billion. Astonishingly, there was not a single year in this time period when income flowed into Illinois.
Of course, when someone leaves, the lost income isn’t limited to the year the person left. It’s lost for every year after that, too. Table 1b shows that compounding the income losses over the 19 years considered above produces a total of $451 billion lost.
More troubling for policymakers, had this income stayed in Illinois, state and local governments would have annually collected an estimated $8 billion, in 2015 dollars, in higher taxes over this time period, as Table 4 shows. This not only includes higher income taxes but also higher sales and property taxes. Compounded, this tax loss climbs to $74 billion.
The loss of income is not just due to more people moving out than moving in but also to out-migrants having higher incomes than in-migrants. As shown in Table 1c, between 1995 and 2013, the average income of out-migrants was $66,745, while the average income of in-migrants was $58,825 – a difference of $7,920. The gap has widened in recent years, but some of that may be a reflection of methodological changes in the IRS data (see methodology section for details).
Additional details about Illinois migrants have recently been provided by the IRS through its “gross migration file” that shows taxpayer age and income class. An important insight from this data is that the average income of out-migrating taxpayers earning more than $200,000 is not only higher than for in-migrants ($484,254 compared with $419,563) but also shows a greater increase post-move (17.4 percent versus 11.4 percent).
This points to an important caveat about using this IRS data: Income does not equal wealth. A migrating individual could be a business owner with significant personal and business assets. If that person moves to Florida (with no income tax), he or she could sell the business post-move and pay nothing in state capital gains taxes. As such, the loss in income and taxes shown in this study should be viewed as the minimum loss. If the losses are derived from other discretionary income (such as business income or capital gains), the loss to Illinois’ economy and government coffers is likely to be significantly higher.
For example, New Jersey is getting a lesson on the impact on its state budget due to the out-migration of a single individual. Of course, the individual in question is multibillionaire David Tepper, who founded the hedge fund Appaloosa Management. Not only is Tepper taking his current income with him, but it is very likely that he won’t be selling any business assets until he has planted his feet on Florida soil as a resident.
To reverse Illinois’ out-migration problem, policymakers must gain an understanding of why residents are leaving. As shown in Table 5a, one way to do this is by comparing various characteristics of Illinois to those of the destination states.[i] In economic terms, out-migrants express their “revealed preferences” by moving to another state more in line with their preferences and values. This report compares Illinois with these destination states via 10 common variables used in migration studies: private-sector jobs, state and local tax burdens, property-tax burdens, income-tax burdens, estate-tax burdens, state debt burden, union membership, population density, cost of living and average temperature.
Private-sector jobs: This variable measures the percentage change in private-sector jobs between 1995 and 2013.[ii] Private-sector jobs growth in Illinois was 6.4 percent. Households left Illinois for states where jobs growth was 339 percent higher (27.9 percent), while for people it was 332 percent higher (26.9 percent), and for income it was 364 percent higher (29.6 percent).[iii] Overall, migration of income was the most sensitive to private-sector jobs growth.
State and local tax burden: This variable measures total state and local taxes collected as a percent of personal income as averaged over the 1995-2013 time period.[iv] Illinois’ average tax burden was 10.4 percent. Households left for states where the tax burden was 4.7 percent lower (10 percent), while for people it was 5 percent lower (9.9 percent), and for income it was 5.4 percent lower (9.9 percent). Overall, migration of income was the most sensitive to state and local tax burdens.
Income-tax burden: This variable measures total state and local income taxes collected as a percent of personal income as averaged over the 1995-2013 time period.[v] Illinois’ average income-tax burden was 1.9 percent. Households left for states where the income-tax burden was 10.8 percent lower (1.7 percent), while for people it was 11.6 percent lower (1.7 percent), and for income it was 21.5 percent lower (1.5 percent). Overall, the migration of income was the most sensitive to state and local income-tax burdens.
Property-tax burden: This variable measures total state and local property taxes collected as a percent of personal income as averaged over the 1995-2013 time period.[vi] Illinois’ average property-tax burden was 4 percent. Households left for states where the property-tax burden was 23 percent lower (3.1 percent), while for people it was 21.9 percent lower (3.1 percent), and for income it was 21.6 percent lower (3.2 percent). Overall, migration of households was the most sensitive to state and local property-tax burdens.
Estate-tax burden: This variable measures estate taxes collected as a percent of personal income in 2013. Illinois’ average estate-tax burden was 0.05 percent. Households left for states where the estate-tax burden was 74.8 percent lower (0.01 percent), while for people it was 70.7 percent lower (0.02 percent), and for income it was 77.6 percent lower (0.01 percent). Overall, migration of income was the most sensitive to estate-tax burdens.
State debt burden: This variable measures per-person state debt in 2013. Illinois’ average state debt burden was $43,400. Households left for states where the state debt burden was 86.4 percent lower ($5,904), while for people it was 88.1 percent lower ($5,173), and for income it was 86.2 percent lower ($5,975). Overall, migration of people was the most sensitive to state debt burdens.
Union membership: This variable measures the percent of the state’s employed labor force who are members of unions as averaged over the 1995-2013 time period. Illinois’ average union membership was 17.4 percent. Households left for states where union membership was 42.5 percent lower (10 percent), while for people it was 43.9 percent lower (9.7 percent), and for income it was 45.4 percent lower (9.5 percent). Overall, the migration of income was the most sensitive to union membership.
Population density: This variable measures total population divided by land area and is averaged over the 1995-2013 time period. Illinois’ population density was 225.8 people per square mile. Households left for states where the population density was 20 percent lower (180.6 people per square mile), while for exemptions it was 29.5 percent lower (159.2 people per square mile), and for income it was 14.6 percent lower (192.9 people per square mile). Overall, the migration of people was the most sensitive to population density.
Cost of living: This variable measures the cost of living as averaged over the 2008-2013 time period. Illinois’ cost of living was above the national average at 100.8 (100 equals the national average). Taxpayers left for states where the cost of living was 3.6 percent lower (97.2), while for people it was 4.8 percent lower (96), and for income it was 2.6 percent lower (98.2). Overall, the migration of people was the most sensitive to cost of living.
Average temperature: This variable measures the annual average of the daily mean temperature. Illinois’ temperature by this measure was 50 degrees Fahrenheit. Households left for states where temperature averaged 20.8 percent higher (60.4 degrees), while for people it was 19.8 percent higher (59.8 degrees), and for income it was 24 percent higher (61.9 degrees). Overall, the migration of income was the most sensitive to temperature.
Reversing recent acceleration in out-migration
Of course, over the nearly 20 years’ worth of data used in this study, there have been dramatic changes in Illinois public policy. Not coincidently, the worsening out-migration situation since 2009 was exacerbated by the massive income-tax increase in 2011 that raised the individual income-tax rate by 67 percent (to 5 percent from 3 percent) and the corporate income-tax rate by 46 percent (to 7 percent from 4.8 percent).
Fortunately, in 2015, these income-tax increases were partially rolled back with the individual income-tax rate falling back to 3.75 percent and the corporate income-tax rate falling back to 5.25 percent. However, a new threat has emerged. Several neighboring states – Indiana, Michigan and Wisconsin – have recently enacted Right-to-Work laws. The net impact on Illinois migration is yet to be seen but definitely worth watching.
Table 5b examines Illinois’ tax burden over the critical five-year period between 2009 and 2013. The data clearly show that taxpayer preference for states with lower tax burdens has grown stronger since the tax hikes – as revealed by their more recent out-migration patterns.
State and local tax burden: Between 2009 and 2013, Illinois’ average tax burden was higher than the average over the entire 1995-2013 time period (10.9 percent versus 10.4 percent, respectively). Households left for states where the tax burden was 10.3 percent lower (9.8 percent), while for people it was 10.5 percent lower (9.8 percent), and for income it was 11.5 percent lower (9.7 percent). Overall, migration of income was the most sensitive to state and local tax burdens.
Income-tax burden: Between 2009 and 2013, Illinois’ average income-tax burden was higher than the average of the entire 1995-2013 time period (2.2 percent versus 1.9 percent, respectively). Households left for states where the income-tax burden was 28.2 percent lower (1.6 percent), while for people it was 29.7 percent lower (1.6 percent), and for income it was 40.8 percent lower (1.3 percent). Overall, the migration of income was the most sensitive to state and local income-tax burdens.
Property-tax burden: Between 2009 and 2013, Illinois’ average property-tax burden was higher than the average of the entire 1995-2013 time period (4.4 percent versus 4 percent, respectively). Households left for states where the property-tax burden was 25.9 percent lower (3.2 percent), while for people it was 25.4 percent lower (3.3 percent), and for income it was 24.5 percent lower (3.3 percent). Overall, migration of households was the most sensitive to state and local property-tax burdens.
This response to higher tax burdens is not a coincidence. In fact, two recent econometric studies have also found that migration responds to tax burdens.
First, economists Antony Davies and John Pulito wrote:
This paper explores the relationship between high-income tax rates and the interstate migration of high-income households. Controlling for property-tax rates, sales-tax rates, high-income tax brackets, unemployment, and state/county-specific and time-specific effects, we find that higher state income-tax rates cause a net out-migration not only of higher-income residents, but of residents in general. We also find that changes in the income levels to which the tax rates apply similarly affect out-migration. For county-level data, we find that high-income households react to a lowering of income levels to which higher tax rates apply in the same way that they react to increases in the tax rates themselves. This behavior suggests that the tendency to lower the threshold for “high income” or “millionaire” households to capture households that are not millionaires may entice those households to follow the behavior of millionaire households and flee to more tax-friendly environs. Finally, for state-level data, we find that the effect of property taxes on migration is significantly stronger than the effect of high-income tax rates on migration. For example, a one percentage point increase in the property-tax differential between two states has almost three times the effect on migration as does a one percentage point increase in the difference in high-income tax rates.
Second, economist Jacob Feldman found:
For all states, this study highlights the importance of minimizing tax burden differences with neighboring states. Specific states such as Texas and Tennessee are well situated to attract income from bordering states. These two states have lower tax burdens than all their neighbors (four and eight, respectively). Other states such as California, Florida, and New Jersey have a regional tax problem where higher tax burdens lead wage earners and entrepreneurs to move next door on an annual basis. Certain states such as Illinois and New York with many bordering states are regionally uncompetitive with most neighbors. To remain attractive to businesses and high-skilled workers who are most sensitive to these differences, policymakers will need to reduce tax burdens. Each positive 1 percentage point difference in the tax burden increases the ratio of net income out-migration to the bordering state by 6.78%. In years where income migration levels are relatively high, this effect will be more poignant.
Will Illinois’ out-migration get better?
Though lacking the detail of the IRS migration data, the most up-to-date data available on domestic migration come from the U.S. Department of Commerce’s Census Bureau. The census data are more comprehensive in that they include the migration of people beyond those who file tax returns – such as the elderly or young people who may not earn enough income to pay taxes.
Yet, since the two data series are highly correlated, the census data can show whether the Illinois migration picture is getting better or worse. Chart 3 and Table 6 show net domestic migration between 1991 and 2015. On average, Illinois has been losing 67,475 people per year for a total net loss of 1,686,885 people over this time period.
The Great Recession slowed Illinois’ out-migration because it significantly disrupted the housing market. Naturally, the inability to sell one’s house is a major impediment to moving. However, beginning in 2009, the housing market has slowly recovered, and that has coincided with the resumption of out-migration. Out-migration now exceeds the levels it reached just prior to the economic downturn – setting record lows in 2014 (-96,762) and 2015 (-105,217).
Overall, the census data paint a grim migration picture and strongly suggest that future releases of IRS migration data will show continued and increased flight of households, people and income from Illinois. This trend will likely continue until Illinois rectifies the factors that are driving its out-migration problem.
People, and their income, are inclined to move where there is greater growth in private-sector jobs, taxes are lower (especially estate taxes), state debt burdens are lower, union membership is lower, population density is lower, the cost of living is lower, and it is warmer. Additionally, AGI is the most sensitive variable when it comes to private-sector jobs growth, state and local tax (and income and estate-tax) burdens, union membership and average temperature. The data show that people and their incomes are leaving Illinois for states that fit these characteristics, especially Florida.
Without action, out-migration will continue to reduce the ability of both the private and public sectors to ensure Illinois’ economy remains strong and vibrant. This study provides a road map for making the necessary policy changes. Two obvious policy issues are pushing for the full rollback of the 2011 individual and corporate income-tax increases and enacting Right to Work to stay competitive not only with longtime out-migrant states such as Texas and Florida but also with neighboring states that have recently enacted Right-to-Work laws.
The IRS data used in this study are derived from the calendar year 1995 to 2013 State-to-State Migration Data-Set, or SSMD, that is published annually by the Statistics of Income Division of the IRS. To qualify for inclusion in the SSMD, the IRS compares address information supplied on a taxpayer’s tax form between two years. If the address is different in Year 2 from Year 1, then the taxpayer is classified as a “migrant”; otherwise, the taxpayer is classified as a “non-migrant.”
The major strength of the SSMD is that it is based on actual data – not a survey – and accurate reporting is enforced with criminal penalties.[ii] This makes the SSMD especially reliable as a data source given people’s incentive to be truthful in their data reporting. In addition, the SSMD includes reported AGI, which allows researchers to track both population and income flows.
On the other hand, the major weakness of the SSMD is that it overlooks certain segments of the population. For instance, it excludes low-income groups such as students, welfare recipients and the elderly because the standard deduction and exemptions are greater than their income.
For the years 2011, 2012 and 2013, the IRS introduced several methodological improvements. Perhaps the most important was the change from partial-year data to full-year data. This change is especially important for high-income taxpayers who often file for tax-filing extensions. Thus, changes in income migration post-2011 should be cautiously interpreted, since some part of the change is due to this methodological shift.