Migration has played a significant role in shaping our domestic and international economies, and its impact has become increasingly prominent in recent years.
Domestically, migration patterns that had been stagnant for decades accelerated during the pandemic as workers embraced “work-from-home” arrangements, choosing where to live based on both economic and quality-of-life incentives. Movement from higher-cost-of-living and tax-burden locations to lower ones boomed. Generally, people left the Northeast, Midwest, and West Coast states, opting for the Sunbelt and Mountain West regions (as seen in the map below from the Kansas City Federal Reserve Bank).
Source: Federal Reserve Bank of Kansas City
Not surprisingly, when we examine workforce growth at the state level since the pandemic, we can see how these domestic migration patterns have impacted jobs. In the chart above, many of the states in blue, indicating net gainers of domestic migration, have also seen the most robust workforce growth (as seen in the chart below).
Source: Bureau of Labor Statistics
These population shifts have long-lasting implications for local economies and tax bases. The impacts of property values, sales, and income taxes on state and local governments can be significant. More high-profile fiscal policy challenges in states like California and Michigan have garnered headlines, but other regions face similar challenges.
When examining these patterns at a county level, we can see migration patterns even within states. In California, for example, we can see movement from the more expensive and densely populated areas around Los Angeles and San Francisco to other parts of the state.
In the chart below, the Joint Center for Housing Studies (JCHS) at Harvard used Census Bureau Data to document these movements by county in 2023.
Source: Census Bureau Data
Internationally, in 2022 and 2023, vast influxes of migrants (both documented and undocumented) propelled workforce growth well beyond what many conceived possible. This has had significant macroeconomic implications, propelling U.S. workforce growth to more than twice the level otherwise expected.
Again, using 2023 data from JCHS at Harvard, we can see where international migrants end up. The map below shows that international migrants are moving to many places, losing their domestic populations in California, Washington, and the Northeast. This helps offset lost populations and keeps the job market and local tax bases more stable than they would otherwise. International migrants are moving to high-growth regions in Florida, Texas, the Carolinas, Arizona, and parts of the Mountain West, further fueling growth in these regions already benefiting from domestic migration.
Source: Census Bureau Data
Looking forward, we should not expect these trends to continue simultaneously. In addition to the projected slowdown in international migration, we are already seeing signs that the domestic migration boom of the pandemic is slowing considerably.
The chart below, based on data from the Census Bureau, shows that the number of states experiencing population decline due to domestic migration significantly decreased in 2023 compared to 2022. Additionally, the number of states and territories witnessing a loss of 0.5% or more went from 5 to just 1 in 2023. Other indicators, such as one-way U-Haul rentals, point to a return to more normal levels of domestic migration.
Source: U.S. Census Bureau
Although the pandemic migration boom may have ended, lower-level domestic migration remains intact. The current international migration boom is helping many regions offset these outflows domestically. Still, it should not be counted on in the long run as these levels are expected to normalize gradually over the coming years.
Undoubtedly, the detailed demographic changes discussed materially impact local economies, including the areas from which people are migrating and areas to which they are relocating. Furthermore, these impacts are expected to have long-term repercussions unless an improbable reversal of the migration pattern occurs.
As shown in the chart below, transportation services such as the Metropolitan Transportation Authority (MTA) in New York City (the largest mass transit system in the U.S.) experienced significant challenges in resuming pre-pandemic revenue results. Large infrastructure projects such as mass transit systems have substantial infrastructure and fixed costs associated with their operation and maintenance.
Significant declines in ridership and revenue resulting from pandemics like COVID-19 put an additional strain on the system, which cannot simply scale down operations in line with a decrease in demand for the service. Not surprisingly, the decline in ridership due to pandemic work-from-home arrangements and the ensuing migration of workers away from locales such as New York and California strain the systems firmly embedded in those areas.
Taking the revenue analysis a step further, approximately 25-50% of transportation funding is sourced from federal government programs contingent on the size of the system. Aside from toll and farebox collections, the remainder of the revenue is sourced from state or local funding, either as appropriations of taxes or dedicated sales tax revenues.
Naturally, locales experiencing an increase in population benefit from more significant revenue streams from the various taxes from which allocations are drawn to fund transportation services. On the other hand, areas experiencing a population decline are burdened with a decrease in tax revenue that would have likely been used toward infrastructure projects and maintenance.
Cities undergoing rapid population growth, such as Houston, Dallas-Fort Worth, Austin, and San Antonio, require investment in large-scale transportation and infrastructure projects to meet the growing demand. In August of last year, the Texas legislature unanimously adopted a $142 billion investment for transportation infrastructure, specifically with a record $100 billion 10-year investment in statewide road construction. This represents a $15.5 billion increase in funding over the previous year’s outlay for projects over the next ten years. Thus, investments are being planned and budgeted for infrastructure projects to help manage the increase in population for states experiencing such growth. The larger population requires more services but also increases tax revenues, which can, in turn, be invested in infrastructure projects.
The chart below illustrates changes in housing market value by state, comparing the states with the most significant increase to those with the smallest between 2019 (before COVID-19) and April 2024. As one would suspect, housing values have increased significantly in states receiving an influx of new residents— Florida, Arizona, Tennessee, Texas, North Carolina, and South Carolina. Yet, the states with the most significant exodus of migrants – New Jersey, Massachusetts, Connecticut, California, Illinois, and New York – have experienced the smallest increases in housing values. The divide between states becomes even more exacerbated when factoring in the impact of inflation on the rise in housing values.
Since property tax revenue is directly tied to property tax value, a more significant increase in property tax value leads to larger property tax collections by local municipalities. On average, across all 50 states plus Washington D.C., property tax revenue accounts for nearly 33% of the total tax revenue collected by state and local governments. Thus, the collected property tax revenue increases as property tax values increase. This allows for improved services and infrastructure provided to residents in those communities. Such benefits contribute to a better quality of life for residents with better school systems, parks and recreation services, police and fire departments, healthcare and housing services, and public works (sewers, street construction, and repair).
Contrarily, the communities undergoing a population decline experience a smaller impact on property values. In turn, they do not experience benefits with increased property tax revenue collections. Communities impacted by lower property tax revenues suffer from declines in service quality and lower quality of life. They also struggle with increased per capita costs for service, creating further difficulties in managing their needs.
Specifically, population shifts can significantly impact the most basic of services, namely municipal water systems. The infrastructure required to provide clean water for public use and consumption is incredibly expansive in scope. It represents a significant fixed cost with limitations on the ability to scale operations up or down depending on usage. The significant majority of water system infrastructure is antiquated, with many ranging between 40 and more than 100 years old, requiring constant maintenance and repairs, not to mention ongoing efforts to upgrade and improve the system.
States and municipalities are experiencing varying challenges regarding water system delivery and usage. Locales with a population decline are suffering from a fall in revenue from the decreased water system use. Thus, already stressed water systems with aged infrastructure have less revenue to maintain and improve the systems. As mentioned previously, very little can be done to scale down delivery or operations due to a decline in the population. These challenges mainly affect the smaller rural and less wealthy locales in the Northeast, a topic we will cover later.
Other states face challenges regarding the need to expand water supply systems to meet the needs of their growing population. Though this may be a good problem, and the increased population brings increased revenue streams to help fund the construction, such efforts take time to complete. Furthermore, the existing infrastructure requires continuous maintenance and repairs. The Texas Water Development Board estimated that 2021 water loss cost utilities over $266 million. Thus, even states with growing populations experience difficulties regarding costly losses resulting from decaying infrastructure.
Analyzing the changes in population between rural and urban areas, the challenges presented for municipal services become apparent. As demonstrated in the below chart from the U.S. Census Bureau, rural communities in the state of New York experienced a 3.4% decline in population between 2011 and 2021, whereas the state experienced a 4.2% increase. This pattern has been a consistent trend in rural communities throughout the U.S. over the past several decades. Though census data following the COVID-19 pandemic is unavailable, anecdotal evidence suggests this long-term trend has remained intact. As stated in a September 2023 report from the New York State Comptroller titled Rural New York: Challenges and Opportunities, “While a decreasing population can mean that there are fewer people to provide services, it can also mean that it is more expensive on a per capita basis to provide those services, especially when there is a baseline or fixed cost associated with providing service at all.”
The above quote captures the specific challenges faced by communities experiencing a decline in population and dealing with fixed, aging infrastructure for basic services such as clean water, electricity, and broadband. As discussed previously, a smaller population equates to a smaller tax base, lower usage of such services, and a decrease in revenue to support the infrastructure needed to maintain the systems. Over an extended period and looking into the future, this pattern poses a real threat to the sustainability of rural communities. Furthermore, efforts to reverse the trend are extremely difficult to enact.
In conclusion, migration patterns within the U.S. have extensive and far-reaching implications for the municipal systems servicing local communities. While growing populations create challenges in managing the need for increased infrastructure, the benefits of larger revenue sources to fund the need directly help. Contrarily, declines in population impact communities negatively due to decreased economies of scale for the expansive systems intended to provide vital services to residents. Furthermore, decreased revenue resulting from a loss in population to support local municipal infrastructure leads to credit concerns and increased borrowing costs for such entities. Thus, already struggling communities face the added burden of higher costs passed on to service users to fund the continued operation over time. Shifting population profiles creates difficulties for communities regardless of the gain or loss of residents. The downstream impacts on municipal entities require thoughtful planning, execution, and management to overcome such issues.