Over the last 20 years, growth in Seattle has been driven by the high technology and biotechnology sectors. Both of these sectors depend heavily on highly compensated, highly skilled workforces. An important new paper by economists Enrico Moretti and Daniel Wilson indicates that Washington state’s lack of an income tax has contributed to the area’s success in attracting retaining these people. Here is the abstract:

The Effect of State Taxes on the Geographical Location of Top Earners: Evidence from Star Scientists
Enrico Moretti and Daniel Wilson
NBER Working Paper No. 21120
April 2015

Abstract

Using data on the universe of U.S. patents filed between 1976 and 2010, we quantify how sensitive is migration by star scientist to changes in personal and business tax differentials across states. We uncover large, stable, and precisely estimated effects of personal and corporate taxes on star scientists’ migration patterns. The long run elasticity of mobility relative to taxes is 1.6 for personal income taxes, 2.3 for state corporate income tax and -2.6 for the investment tax credit. The effect on mobility is small in the short run, and tends to grow over time. We find no evidence of pretrends: Changes in mobility follow changes in taxes and do not to precede them. Consistent with their high income, star scientists migratory flows are sensitive to changes in the 99th percentile marginal tax rate, but are insensitive to changes in taxes for the median income. As expected, the effect of corporate income taxes is concentrated among private sector inventors: no effect is found on academic and government researchers. Moreover, corporate taxes only matter in states where the wage bill enters the state’s formula for apportioning multi-state income. No effect is found in states that apportion income based only on sales (in which case labor’s location has little or no effect on the tax bill). We also find no evidence that changes in state taxes are correlated with changes in the fortunes of local firms in the innovation sector in the years leading up to the tax change. Overall, we conclude that state taxes have significant effect of the geographical location of star scientists and possibly other highly skilled workers. While there are many other factors that drive when innovative individual and innovative companies decide to locate, there there are enough firms and workers on the margin that relative taxes matter.

Moretti is Professor of Economics at the University of California, Berkeley and author of the book The New Geography of Jobs. Wilson is Research Adviser at the Federal Reserve Bank of San Francisco. The paper can be downloaded via this link. The first 11 pages are not overly technical.