California has an emigration problem, and it seems everyone in the Southwest is benefiting – except for New Mexico. Politics can change that.
Between 2018 and 2019, 71,547 more American households left California for other states than moved there, according to the IRS. Isn’t that strange? California is a place that seems to have everything: beaches and mountains, extensive infrastructure networks, fertile land, generous social benefits and respected universities. However, according to the US Census Bureau, the state has had annual negative internal migration since 1990.
Of the households that left California in 2019, 52% immigrated to states bordering New Mexico. Arizona gained $1.2 billion in adjusted gross income (AGI) from 14,397 California homes. Texas added 14,242 homes, Colorado added 4,762 homes, and Utah added 2,993 homes for a net AGI migration of $2.5 billion.
New Mexico was 13th on the list. Only 1,143 California households, or 1.6%, chose to relocate to the Land of Enchantment.
Why do Californians stop in Arizona and drive through New Mexico to Texas?
According to the Tax Foundation’s 2022 State Business Tax Climate Index, the penultimate edition of our rankings, New Mexico has been ringed by states with greater tax competitiveness. Overall, we ranked New Mexico 27th last year. Meanwhile, Utah was 10th, Texas 14th, Colorado 20th, Arizona from 23rd to 15th, and Oklahoma 26th. California finished 48th. New Mexico’s gross receipts tax rate cut boosted the state’s ranking for our 2023 edition, but it still trails all neighbors except Oklahoma.
Think tax competitiveness doesn’t matter to taxpayers making the leap out of California? Consider these facts: Since 1998, Texas and Arizona have averaged the third and fourth most popular destinations for net migration of California AGIs. New Mexico was 20th. As a result, Texas received $15.9 billion in California revenue while Arizona received $12.9 billion. New Mexico won just $165 million. Between 1998 and 2021, Arizona’s real gross domestic product (GSP) — the inflation-adjusted size of the state’s economy — grew 90%, while Texas’ real GSP grew 96%. New Mexico only grew 40%.
Business and location decisions involve more than just taxes, like infrastructure and a skilled workforce, but it would be a mistake to say that tax policy is irrelevant. The globalization of supply chains often results in job displacement, but according to the US Department of Labor, most mass relocations of jobs occur from one US state to another.
Every economic operator weighs what is most important to him. Right now, tax policy may not be high on New Mexicans’ list of priorities. Still, the taxes paid by corporations will eventually affect everyone, as they will ultimately be 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 receipts tax base to eliminate the damaging effects of the tax pyramid. Residents would also have benefited from policies that reduce upper marginal income tax rates and reduce reliance on volatile oil and gas taxes to fund essential government programs.
Taxpayers and policymakers should remember that governments do not conduct tax policy in a vacuum. Any change in a state’s tax system makes its business climate more or less competitive compared to its neighbors – as California has shown. Will our new statehouse take advantage of the opportunity that California New Mexico offers?
The Tax Foundation is a nonpartisan think tank based in Washington, DC