Californians bring their billions to all NM neighbors

California has an emigration problem, and it seems everyone in the Greater Southwest is taking advantage of it, except New Mexico. Policy makers can change that.

According to the IRS, between 2018 and 2019, 71,547 more American households left California for other states than they moved there. Isn’t it strange? California is a place that seems to have it all: beaches and mountains, vast infrastructure networks, fertile land, generous social benefits and respected universities. Yet, according to the U.S. Census Bureau, the state has experienced annual negative net inward migration since 1990.

Of the households leaving California in 2019, 52% migrated to states bordering New Mexico. Arizona gained 14,397 California households worth $1.2 billion in adjusted gross income (AGI). Texas gained 14,242 households, Colorado gained 4,762 households, and Utah gained 2,993 households, for an AGI net migration of $2.5 billion.

New Mexico was 13th on the list. Only 1,143 Californian households, or 1.6%, have chosen to settle in the land of enchantment.

Why do Californians stop in Arizona and cross New Mexico to reach Texas?

According to the Tax Foundation’s 2022 State Business Tax Climate Index, the second most recent edition of our ranking, New Mexico was surrounded by states with greater tax competitiveness. Overall, we ranked New Mexico 27th last year. Meanwhile, Utah ranked 10th, Texas was 14th, Colorado 20th, Arizona was on the way to 15th from 23rd, and Oklahoma was 26th. California was 48th. The reduction in New Mexico’s gross receipts tax rate improved the state’s ranking for our 2023 edition, but it still trails all neighbors except Oklahoma.

Think tax competitiveness doesn’t matter to taxpayers leaving California? Consider these facts: Since 1998, Texas and Arizona have been, on average, the third and fourth most popular destinations for net migration from California AGI. New Mexico was the 20th. As a result, Texas received $15.9 billion in California revenue, while Arizona received $12.9 billion. New Mexico won only $165 million. Between 1998 and 2021, Arizona’s real gross state product (GSP)—the size of the state’s economy adjusted for inflation—grew 90%, while Texas’ real GSP increased by 96%. New Mexico’s only increased by 40%.

Business and location decisions are not limited to taxes, such as infrastructure and a skilled workforce, but it would be a mistake to suggest that tax policies are irrelevant. Globalization of supply chains has often taken precedence over job shifting, but according to the US Department of Labor, most mass job relocations are from one US state to another.

Each participant in an economy weighs what is most important to them. Right now, tax policies may not be high on the list of priorities for New Mexicans. Nevertheless, taxes paid by corporations will eventually affect everyone as they are ultimately borne by individuals through lower wages, higher prices and lower living standards. Many taxpayers leaving California can attest to this firsthand.

New Mexico can become a more attractive destination for businesses and families by first reducing the gross revenue tax base to eliminate the harmful effects of the tax pyramid. Residents would also be well served by policies that lower top marginal tax rates and reduce reliance on volatile oil and gasoline taxes to fund essential government programs.

Taxpayers and policymakers should remember that states do not institute tax policy in a vacuum. Every change in a state’s tax system makes its business climate more or less competitive with its neighbors – as California has shown. Will our new state house seize the opportunity California offers New Mexico?

The Tax Foundation is a nonpartisan think tank in Washington, D.C.

About Wilhelmina Go

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