Improve Federalism by Rewarding Interstate Movement

Chicago, IL and Toledo, OH interstate highway sign

One of the glories of our constitutional structure is competitive federalism. Under the original Constitution, the states had very substantial powers of regulation. But they were disciplined in large measure because they were forced to compete in a market for governance. If a state imposed too many burdens on their citizens through either taxation or regulation or failed to provide needed public goods, citizens could leave.

For competitive federalism to work well, the federal government, however, does need to facilitate it. Most important are the constitutional rights that ease movement. Article IV of the original Constitution requires each state to extend the privileges and immunities it extends to citizens within its state to citizens of other states. Presumably that right effectively guarantees free movement in, out and, within the state for out-of-state citizens since states universally grant that right to their own citizens.  The self-ownership assured by the Thirteenth Amendment eliminated a legal obstacle that African Americans faced travelling from state to state.   The First Amendment assures that citizens can hear about conditions in other states and compare it to their own.

But it is not only the Constitution but federal statutes that can make a difference to the vibrancy of state competition. For that reason, the Trump administration’s proposal to eliminate state and local tax deductions is most welcome. These deductions weaken federalism’s market for governance, because they force citizens in low tax states to subsidize citizens in high tax states.  Or to put in another way, New Yorkers and others in high tax states faces fewer incentives to leave if they are dissatisfied with the public goods they get in return for high taxes because citizens in other states are picking up part of the tab. And because their citizens are less likely to leave, inefficient states have fewer incentives to reform. Citizens in well governed states also get fewer benefits due to the good governance of their states.

Indeed, I would consider having the federal government intensify competition among the states by improving the incentives to move from one state to another.   Thus, the federal government might give a tax credit for moving to a different state. Even those who do not itemize their deductions could take advantage of the credit. That credit would be a particular aid to the working poor who are now often stuck in states where state policies have created a poor economic climate.

Tyler Cowen worries that one hindrance to our economy is the decrease in Americans’ willingness to move to take advantage of the best opportunities.  The credit would help with that as well. But its best aspect would be to increase competition in federalism’s market for governance.

Reader Discussion

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on May 18, 2017 at 12:45:14 pm

Gee, thanks for the "welcome" competition and more taxes for the little guy.
Yep, give a credit to move to someone who can;t find a job in either state and all will be well.

Oh, the unbridled joys and unmatched power of *competition*.

Yep, let the Trumpster do this - along with eliminating (effectively) the home mortgage interest deduction. I am certain all those lower and middle class homeowners will welcome the "tax competition" (not to mention the pass through effect on renters)

Hey, McGinnis did Chuck Schumer talk you into this.
The Dems and their media hounds will have a very *competitive* field day trying to outdo each other in their excoriation of those" heartless / greedy Republicans."

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Image of gabe
on May 18, 2017 at 15:06:39 pm

I don’t think gabe is being fair to McGinnis’s argument.

1. When we debate tax policy, we should distinguish between tax design and tax levels. Imagine if the feds phase out deductions for state income taxes (or the home interest deduction) as they also reduce tax rates (or increase the standard deduction) so that on average taxpayers pay the same. This would change the tax design, but leave rates more or less unchanged.

Now there’s no special cause to complain about “more taxes for the little guy,” right? Indeed, quite the opposite: I expect that both the deduction for state taxes and the home interest deduction tend to provide more benefits to the rich than the poor. By eliminating these provisions, and using the added revenues to offset other taxes, the little(r) guy should derive an overall benefit.

2. That said, the OVERALL effect of McGinnis’s policies might well harm “the little guy” by promoting the libertarian agenda of attacking the social safety net.

How? First, states with the most generous social safety nets tend to be states with the highest taxes. By eliminating the federal tax deduction for state taxes, you’d eliminate a subsidy a federal subsidy for those safety nets, rendering them less popular. I disfavor this, but I don’t find it especially unfair. The unfair part comes next.

Second, I share gabe’s skepticism about creating moving subsidies as a way to induce people to move to where the jobs are. If the salaries are not sufficient incentive to get people to move, then employers can simply raise the salaries until they are. I can’t recall any other time that McGinnis advocated tampering with the market mechanism; why now?

Here’s why: Moving subsidies might have an effect not on people gaining employment, but on people who lack it. If you’re in bad financial straits, you might prefer to move not to a state with lots of jobs (which you haven’t managed to get), but to a state that has – ta da – a strong social safety net. Recall Republican Rep. Robert Pittenger’s discussion about the idea that some states might adopt policies that would effectively remove coverage for people with pre-existing conditions: If you don’t like it, move to a state that WILL cover you. In policy circles, this is called a “bugger thy neighbor” policy. It doesn't solve a problem; it just shifts the costs to someone else.

And it’s the classic non-libertarian/libertarian dispute: Non-libertarians tend to acknowledge that we have a modicum of social cohesion and thus will band together to defray certain unavoidable costs. That was the theory underlying Obamacare. Honest libertarians forthrightly reject this view and proclaim that they care nothing about other people’s problems. Dishonest libertarians dissemble, saying that they DO care, but then designing policies to cause the costs of social policies to be borne by anyone but themselves.

So society has certain unavoidable costs, such as the fact that some people have expensive genetic conditions. We can devise a way to share those costs on an equitable basis. Or we can devise a way to shift those costs, equity be damned. I fall into the former camp. But we all know people who fall into the latter ones.

In conclusion, I don’t have a huge problem with socializing moving costs on a national level—provided we also socialize safety net costs on the national level. But then, I favor socializing safety net costs on a national level, regardless.

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Image of nobody.really
on May 18, 2017 at 15:27:24 pm

Good essay. I never considered that low-tax states were subsidizing the high-tax states.

As for the subsidy, I'm not sure that all of the state governments would take kindly to the feds paying poor people to move to a different state. Those are Democratic party voters with pro-Democratic votes.

(That dripping sound you hear is the sound sound of a hundred political social engineers drooling at the thought of what they could do with such a subsidy.)

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Image of Scott Amorian
Scott Amorian
on May 18, 2017 at 17:26:23 pm


My primary concern was a "tactical" one.
Just imagine what the Schumers of the world will do - how it will be portrayed?

I care not a fig for a "moving subsidy" OTHER than to ask, "Where in that (now) much abused document, the US constitution, does the power to "subsidize" moves, or as McGinnis would have it, Federalism, albeit a federalism that would "beggar thy neighbor," emanate?

My copy is a tad bit tattered but still I do not detect such a power.

Also, like you, I suspect it may not be as effective as McGinnis would hope.

Yep, about tax design and levels. again, a *clever* bugger like Schumer will depict this as another example of the unfeeling / selfish right. It would appear current mortgage interest discussions deny such a deduction to those with mortgages UNDER $608K. Boy, that will sound really great to Joe (or gabe) Homeowner. The offsets will be buried under the usual Democrat scatology (and will, in all probability, eventually be reduced.

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Image of gabe
on May 22, 2017 at 11:33:08 am

I’m not sure that all of the state governments would take kindly to the feds paying poor people to move to a different state. Those are Democratic party voters with pro-Democratic votes.

Yes, it's true (contrary to much commentary) that poor voters--including poor whites without college educations--tended to favor Clinton over Trump.

But that's just a statement about poor people who vote. And poor people vote at a lower rate than almost any other demographic. If that weren't true, we'd expect to see states with a disproportionate share of poor people--a/k/a the South--electing more Democrats.

In sum: Poor people does not equal Democratic votes.

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Image of nobody.really

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