Secondly, income tax usually has very little or no impact on relocation decisions of both the rich and the poor. Most of these people are tied by family, friends and their jobs. Statistics show a very small percentage (averagely 1.7%) of residents in the U.S moved from one state to the other between 2001 and 2010. Some of these moves were across state lines in the same metropolitan areas. Research has noted that there are numerous reasons why people migrate to long distances or fail to migrate but taxes have not had a major effect.
Also when looking at the primary motives, taxes and incentives are not taken to be a primary motive to migrate. There are many factors that contribute to a person moving for a long distance. There are large economic reasons involved like cheaper housing or a new job. If all forms of taxation are to be taken into account, interstate tax differentials are just a few points of income in terms of percentages. The payoff from moving into a cheaper household by far out does that of moving to a relatively low tax state.
There is also another argument which is supported by research to show that taxes and business incentives do not affect business and personal mobility. Research shows that the above-average income earners are more likely to be affected by the factors that deter people from migrating. For example, married couples which are more likely to have higher incomes tend to relocate to places where their incomes are high. Once they have settled there they tend not to move again to avoid disruptions. Higher income earners are also likely to own homes. Relocating tends to be hectic for them because of the costs involved in moving like selling the house. Young people below the age of 24 are more likely to move because they have not yet secured stable jobs as compare to older people. Unemployed people are more likely to base their decisions to migrate on taxes and incentives.
In addition, taxes and economic incentives are viewed to be like double-edged knives when it comes to attracting migration. Taxes are used to finance social amenities like security, recreational opportunities and cultural facilities. Low taxes therefore compromise provision of these services and this deters potential migrants. It has been observed that low taxes can in fact repel potential migrants. This is because taxes are used to provide publics services and maintain high standards in states. A state with low taxes will hence not be able to maintain and improve the quality of services. As much as low taxes mean low cost of living, they might not potentially attract any immigrants. The same goes for economic incentive. Provision of incentives can be seen to compromise the services in a certain state.
The reasons why taxes and economic incentives do not affect mobility decisions are even more to high earners. Most of the high incomes earning individuals are prominent leaders in the community. Some are tied to local doctors who take care of their health. Others live close to friends and family members and do not intend to break the strong ties by migrating. Many of them view taxes as a means of means of maintaining public amenities of the community which they so treasure. Inter-state taxes have a very minimal effect on migration of people and businesses and should not bar policymakers from making any necessary changes.
The first way of looking at the effectiveness of state economic incentives is explained by research. Research has shown that local taxation rarely influences the location decision of businesses. It has also been found that state incentives and tax cuts do not create jobs and increase economic activities if public services are reduced to pay for them. It has also been found that economic incentives are not the reasons for job transfers between different states. There is significant loss of jobs resulting from reduction in public services due to incentives and tax cuts. This is enough proof to conclude that state economic incentives are not effective because they do not serve their main purpose.
Secondly, only a small percentage of firms have been found to show interest in locating in states that offer business tax incentives. Most firms do not consider relocating to other states. Business location is determined by other factors like accessibility to raw materials, labour costs, market size, quality of transport systems and market size. Business incentives and tax cuts only have a small significance to where businesses are located. This shows that state economic incentives are not effective.
Thirdly, economic state incentives have minimal effect on the decisions made of businesses. Survey has found that taxes have significant influence on a business only if it is a matter of business incentives. Another study found that incentives rated after labour availability, market accessibility, labour rates, executive convenience, corporate communication and accessibility to supplies in determining location of a business. Other studies have also shown that business incentives and taxes are not significant in determining location of businesses. We can thus conclude that state economic incentives are not effective.
In another view, transfer of jobs from one state to the other and loss of jobs is not directly related to economic incentives. There is also no evidence that business incentives create jobs in real sense. Studies have also shown that incentives and local tax cuts can have positive results on economic growth only if no government services are reduced to pay for the reductions in taxes. This shows that state economic incentives are not effective because they are subject to conditions.
It is also argued that tax cuts and state economic incentives are an inefficient use of local and state government money. This incentives cause the government to lose more revenue than the income gained by the firms as a result of the incentive. Tax incentives are therefore not very effective if they do not come with increase in tax revenue. If taxes are increased then an incentive still does not make sense because it is passed to the government in terms of high tax.
The tax cuts and state economic incentives are not effective if they are given to businesses which had already planned to use funds. The state governments have no way of ensuring that they provide the incentives only to businesses which did not have ability to invest. Money used for incentives in this case could have been used in other programmes for public benefit.
Tax incentives provided in metro areas have been found to most likely lead to intra-state movement rather than interstate business relocation. This is because metropolitan areas exist within a single state and not in overlap states. Intra-state relocations however cause loss in public revenue and result in reduced public services or increased taxes for individuals and businesses. Thus state economic incentives are not very effective.
Finally, here is very little evidence showing that state economic incentives cause businesses to move from high-income areas to low income areas. It has been found that local incentives are offered by areas that do not fit in the category of high unemployment. These incentives have hence not been found to be effective. Also, to many businesses, local and state taxes are only a minor insignificant burden. As a result, tax incentives reducing tax burdens only provide little assistance to the firms and are hence not effective.