Legislatures and governors in many states, typically red states, have been cutting income tax rates while their counterparts in most blue states are keeping income tax rates the same while a few have increased them. The contrast is so systematic that, from a fiscal point of view, we seem to have, within the United States, two countries.
Moreover, even though the vast majority of Americans, including me, would never seriously consider leaving the United States, many of us would consider moving from a blue state to a red state, and many Americans have already done so. That’s good news for the red states and bad news for the blue states.
Income tax in red and blue states
Since 2021, twenty-one state governments have cut income tax rates, including the top-bracket rates. They are: Arizona, Arkansas, Colorado, Georgia, Idaho, Indiana, Iowa, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, New Hampshire, North Carolina, North Dakota, Ohio, Oklahoma, South Carolina, and Utah. Three state governments have cut tax rates for lower-bracket taxpayers but kept the rates the same for people in the top bracket: Connecticut, New Mexico, and Wisconsin.
Over those same five years, twenty-three states have kept their income tax rates the same. They are: Alabama, Alaska, California, Delaware, Florida, Hawaii, Illinois, Maine, Michigan, Minnesota, Nevada, New Jersey, New York, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Vermont, Virginia, West Virginia, and Wyoming.
Of the twenty-three states that kept income tax rates the same, seven are ones that couldn’t have lowered them because they were already at zero: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming.
Finally, three state governments have raised income tax rates: Maryland, Massachusetts, and Washington.
Here’s the striking thing about the twenty-one states that have cut tax rates, including at the top level, and the seven states that have no income tax: almost all are what we now call “red states.” The only four that might be called purple or blue are Arizona, Colorado, Georgia, and Nevada.
Of course, a state government can be classified as a tax cutter even if it cuts income tax rates by a trivial percentage. Colorado, for example, cut its top rate by only 0.15 percentage point. But what’s striking is how large some of the cuts were. The states that cut income tax rates by 1 percentage point or more were, in order of size of cut for the top bracket: Iowa (from 8.53 to 3.8), Louisiana (6.0 to 3.0), Arizona (4.5 to 2.5), Arkansas (5.9 to 3.9), Nebraska (6.84 to 5.2), North Carolina (5.25 to 3.99), and Kentucky (5.0 to 4.0).
State vs. federal tax cuts: two crucial differences
I generally applaud state governments that cut any tax, on income or on anything else, while I’m more taciturn about federal tax cuts. Why? When it comes to budgets and taxes, there are two crucial differences between state governments and the federal government. First, unlike the federal government, no state government can print money. Therefore, a state government cannot finance a budget deficit by buying its own bonds. The federal government can. While the Federal Reserve cannot legally buy bonds from the US Treasury, it can buy Treasury bonds from other sellers. Second, most state governments have a fairly tough balanced-budget requirement.
Consider Alabama’s requirement, which is one of the toughest. Here’s what ChatGPT says, and it’s consistent what fiscally informed friends in Alabama have told me:
If revenues fall short, the governor is required to prorate appropriations and restrict allotments so the state does not run an overdraft or deficit. Agencies cannot simply keep spending their full annual appropriations if the money is not there. At year-end, unpaid appropriations above available cash become void rather than turning into a carried operating deficit.
Not all states have such tough enforcement mechanisms. But a tough balanced-budget requirement means that a state government cannot cut tax rates without taking account of the cuts’ effect on the state budget deficit.
The good news for state governments that cut tax rates is that an x percent cut in tax rates will lead to less than an x percent cut in tax revenues. The reason has to do with incentives, and that brings us to the Laffer Curve.
The Laffer Curve
At a Washington restaurant in 1974, economist Arthur Laffer drew a curve on a napkin: it had tax rates on the x-axis and tax revenues on the y-axis. He did so to illustrate a simple fact about taxes: taxes affect incentives. Raise tax rates by 10 percent (not 10 percentage points), for example, and you’ll increase government revenues by less than 10 percent because there will be somewhat less of the activity being taxed. Symmetrically, a government that reduces tax rates by 10 percent will reduce tax revenues by less than 10 percent because there will be somewhat more of the activity that is newly subject to lower tax rates.
Laffer’s curve illustrated this point nicely. At a zero percent tax rate, the government will raise zero revenue. At a 10, or 20, or 40 percent tax rate, the government will raise some tax revenue. At a 100 percent tax rate that is perfectly enforced, the government will raise zero tax revenue. That means the curve rises as tax rates rise above zero and, at some point, hits a maximum and then falls as tax rates rise further.
You can argue about where we are on the Laffer Curve for any given tax, but you can’t reasonably dismiss the idea. The Laffer Curve is necessarily true.
Lawrence Lindsey, who was the tax economist at President Reagan’s Council of Economic Advisers when I was the health economist, did a thorough study of the effect of the Reagan cuts in marginal tax rates in the early 1980s, and found strong evidence that tax cuts affected incentives. He wrote up his findings in his 1990 book, The Growth Experiment. Lindsey calculated that in 1985, after all the tax cuts were complete, the tax cuts would have reduced federal revenue by a whopping $115 billion if there had been no incentive effects and no effects on the demand side of the economy. This might not sound large but that would have been 2.9 percent of the US GNP in 1985. What did Lindsey find was the actual effect of the tax cuts? A revenue loss of $33 billion, which was only 0.8 percent of 1985 GNP. Moreover, the cut in the top bracket, from 70 percent to 50 percent, actually increased the revenue the federal government got from the highest-income taxpayers.
How does this relate to cuts in state income tax rates? Here’s how. One of the factors that make federal revenue less sensitive to changes in income tax rates, either up or down, is that they are not likely to cause many people to leave the United States (in the case of tax rate increases) or enter the United States (in the case of tax rate decreases). But a state government that cuts tax rates will, all else equal, give people in the forty-nine other states plus DC an incentive to move to that state. That means that there will be more people paying that lower tax rate than there were when it was higher.
You could argue, of course, that with more people in their state, the government needs to spend more. That would be true for some things but not for others. Also, for many items the government spends money on, it would not have to spend proportionally more. With 10 percent more people in a state, for example, the government might need to hire 10 percent more DMV employees but would probably not need to build 10 percent more DMV buildings. The Laffer Curve is a virtuous circle.
Moving from high-tax states to low-tax states
There is strong evidence that people have moved from high-tax states to low-tax states and from high-tax states to states that have cut their income tax rates. The Wall Street Journal’s editorial board, in a March 27, 2026, editorial titled “The High-Tax Wealth Flight Continues,” detailed the shift that the Internal Revenue Service reported from 2022 to 2023. (Why not 2023 to 2024? Because the IRS takes about a year to process the data.) The shift in just one year was striking.
The Journal editors wrote:
Yet states with the highest taxes continue to lose the most income to other states. California lost on net $11.9 billion, mostly to Texas, Nevada, and Arizona. Other big losers include New York ($9.9 billion), Illinois ($6 billion), Massachusetts ($4 billion), New Jersey ($2.6 billion), Maryland ($1.8 billion), and Minnesota ($1.5 billion).
The Journal also noted that those states that gained income from interstate migration included four states without income taxes: Florida ($20.6 billion), Texas ($5.5 billion), Tennessee ($2.8 billion), and Nevada ($1.5 billion). Other big gainers of adjusted gross income included South Carolina ($4.1 billion), North Carolina ($3.9 billion), and Arizona ($2.8 billion).
If people were moving in response to lower income tax rates, an economist would expect to see substantial movement of those subject to the highest rates. That is, indeed, what happened in Massachusetts. The Journal wrote, “Taxpayers making more than $200,000 accounted for 70 percent of the state’s net outflows, roughly double the share in 2019.”
This movement is part of the virtuous circle I noted above. Two of the big-ticket items that state governments spend on are welfare and Medicaid. But high-income people are extremely unlikely to draw on either of those programs.
Conclusion
The fact that people can move from high-tax to low-tax states is good on principle. People living in America legally should be allowed to move wherever they want. But it’s also good on practical grounds. This mobility gives low-tax states an incentive to keep their taxes low. And it may give, although we don’t seem to have seen it yet, an incentive to high-tax states to cut their tax rates somewhat. As a Californian, I can always have hope, however slender that hope.
