Mackinac Center scholars have emphasized in recent years how people matter greatly as facilitators of economic growth and development. Likewise, we have chastised state lawmakers for adopting policies that serve to repel potential in-migrants and chase long-time Michigan residents (and their children) from our borders. U.S. Census Bureau data released today indicate Michigan lost 46,000 more residents from July 1, 2007 to July 1 2008. We were only one of two states to lose population in net terms and we suffered the greatest loss as a percentage of our population. This is another stark reminder of the state's troubles and the public policy choices that helped make Michigan a major exporter of human capital.
We have constructed statistical models to measure the degree to which certain economic phenomena (including policy variables such as tax burdens) influence migration patterns. The models were constructed using data from 2000 through 2006 and after a thorough review of existing migration literature. The output included both national averages and Michigan-specific data. For the purposes of this short essay we focus on data from the Great Lakes State.
People are rational actors who work to maximize their own well-being. One measure of well-being is purely economic. After all, a nice house, cars, private tutors and sports camps cost money. Economic or job opportunities in one area of the country, such as Utah where unemployment is 3.7 percent, may beckon people in Michigan, where unemployment is at a national high of 9.6 percent. Utah is America's number one population growth state (in percentage terms) according to today's Census figure release. While it is unlikely most people think specifically of the tax burden or unemployment rate of a state when making their decision to migrate, they are contributing factors: one metric impacts economic well-being and the other advertises it.
Our statistical analysis found that state and local taxation plays a significant role in Michigan's outbound migration. For every 10 percent differential in per-capita state and local tax burdens with other states, more than 4,700 Michigan residents leave for friendlier climes. Our dataset does not include the $1.4 billion tax hike passed by the Legislature in October 2007, but new Census data likely includes many people who left Michigan as a direct result of it.
The unemployment rate variable also played a significant role in our model. We found that a 1 percentage point increase in Michigan's unemployment rate, holding other state rates constant, led to a loss of 900 people per year. As the gulf between Michigan's unemployment rate and competing states expanded over time, so too did the relative attractiveness of states with more available employment opportunities.
Not surprisingly, weather also played a role. A small 10 percent difference between Michigan and some other state in annual days of full sunshine resulted in 120 out-migrants every year. Sunshine is not the only climate element at work here, but other scholarship underscores Michigan's disadvantage in the weather department. Since politicians can't control the weather we must attempt to offset this disadvantage with vastly more attractive features elsewhere, such as a lower income tax.
Our analysis has long shown that public policies play a very clear role in making the state more or less attractive to people and job providers. Other scholarship supports these findings.
The Pacific Research Institute just published the third edition of its economic freedom index, which is an attempt to measure the economic freedom of the 50 states and rank them accordingly. The index includes 143 variables ranging from state tax policy to regulations to a state's judiciary. High tax and regulatory burdens, for instance, translate into less economic liberty. In PRI's first index in 1999, Michigan ranked 27th among the 50 states in economic liberty. By 2004, we had tumbled to 34th.
This year's ranking places Michigan at 43rd. It is probably not a coincidence that during these years Michigan's per-capita personal Gross Domestic Product — an important measure of state economic health — has tumbled from one of its all-time highs of 16th among the 50 states to 41st through 2007. As we became less economically free our economic fortunes declined.
After ranking states in terms of economic freedom, PRI then examined the migration patterns of the American people. They found that the "net migration rate" for the 20 freest states in their index was 27.4 people per 1,000 while the 20 least-free states saw net migration of just 1.2 per 1000. In other words, people have been voting with their feet, and they voted against Michigan and other similarly situated states.
Michigan needs to improve its attractiveness if it wants to climb out of the economic performance basement. That means dramatic policy changes, such as eliminating the Michigan Business Tax and replacing it only with state spending reductions, passing a right-to-work law to make our labor market more flexible, and reining in the state's regulatory apparatus.
Michael D. LaFaive is director of the Morey Fiscal Policy Initiative at the Mackinac Center for Public Policy, a research and educational institute headquartered in Midland, Mich. Michael Hicks, Ph.D., is director of the Bureau of Business Research at Ball State University in Muncie, Ind., and an adjunct scholar with the Mackinac Center. Permission to reprint in whole or in part is hereby granted, provided that the authors and the Center are properly cited.