Earlier this year, gov. Rick Perry of Texas began running radio ads in California trying to entice its residents to move their businesses to his state. In the ad, which began airing three months after California raised its income tax rate for the state’s wealthiest residents from 10.3% to 13.3%, Perry told listeners to “come check out Texas,” where the taxes are low, the regulations are sensible and the legal system is “fair.”

After hearing the ad, Rick Ashburn, the chief investment officer of Creekside Partners in Lafayette, Calif., says he went to the tax foundation Web site to see the difference between California’s and Texas’ total tax burden, and he saw it was 2%.

“So if I move to Texas, it’s like getting a 2% raise? I wouldn’t move to the next town over for a 2% raise. It’ll cost me 6% to just sell my house,” Ashburn says.

Many seem to share his sentiment, at least in California. Last year, the Stanford Center on Poverty and Inequality looked at migration patterns after California passed its 2005 Mental Health Services Tax, and found the tax had no effect on them.

The issue of how taxes affect migration, and more important, how they affect a state’s financial condition, is particularly relevant right now, given that at least half a dozen states are considering abolishing or significantly reducing their income taxes. Nebraska, Indiana, North Carolina, Louisiana, Ohio and Missouri are all mulling over the issue.

While tax cuts obviously affect a state’s residents, they might also affect another group: municipal bondholders, who want to make sure states have enough money to pay their obligations. Investors and the rating agencies are still waiting to see how all the talk of tax cuts will shake out, but the issue is very much on their radar, experts say.

From a municipal bond investor’s perspective, it comes down to whether a state will have enough revenue to weather any transition once it gets rid of its income tax, says Dan Heckman, senior fixed income strategist with U.S. Bank Wealth Management in Kansas City, Mo.

“We’re very concerned about them successfully generating additional revenue through other tax means,” he says. “We’re concerned about that being a smooth transition, and I would have to think the credit rating agencies will start zeroing in on this issue.”

For now, the rating agencies are more concerned about how states are handling things like the loss in federal revenues as military bases and the regional offices of the Social Security Administration close. In fact, Missouri state bonds were put on credit watch because a large portion of their revenue is from the federal government, Heckman says.

“There’s a thought that as the federal government contracts and reduces outlays, they could be more severely impacted,” Heckman says, though he notes Missouri wasn’t the only state.

While the rating agencies may not have reacted to this latest talk of tax cuts just yet, they’re likely to weigh in once legislation is passed. When California Gov. Jerry Brown raised taxes last year, adding $6 billion to the state coffers, S&P raised the rating on $80 billion in California debt from ‘A-’ to ‘A.’ Conversely, Atlanta residents voted down a 1 cent sales tax hike last August that would have supported transportation projects, prompting Moody’s Investors Service to slash the ratings on bonds issued by the city’s Metro Atlanta Rapid Transit Authority, or MARTA.

“So now they’ll have to face the choice of paying debt service on their bonds or doing basic maintenance or improvements on their system,” says Alan Schankel, director of fixed-income research at Janney Montgomery Scott LLC. “It hurt the bonds.”

Similarly, while Moody’s renewed Kansas’ ‘Aa1’ rating last year after the state lowered its income tax rate from 6.45% to 4.9% for the highest tax bracket, it gave Kansas a negative outlook going forward. The agency said the state’s current financial situation was OK, but given the steep tax cut, Moody’s didn’t know how Kansas would fare going forward.

Investors and the rating agencies will be particularly concerned about how much the states proposing cuts actually rely on income taxes. Ohio, for instance, obtains about 40% of its tax revenues that way. It’s going to have quite a gap to plug if it cuts that tax, says Emory Redd, a managing director at Schenley Park Advisors in Pittsburgh.

“Smart treasurers of states and other municipal organizations work with the credit rating agencies to make sure they’re not going to do something that is terribly damaging,” Redd says.

It shouldn’t be a surprise that the states most reliant on income taxes aren’t the ones that have been talking about tax cuts—largely because they took hits to that revenue base in the economic downturn and many aren’t in very good financial condition right now. States like California, New York, Pennsylvania and Illinois actually have negative fund balances as a percentage of their revenues. The states really talking about cutting their taxes are the ones already in a good financial condition, whose bonds thus already trade at tight spreads.

“The states that talk about eliminating their income taxes are the Midwestern states—states that already have a pretty high credit rating,” Schankel says. “I haven’t seen any state that is financially strapped consider eliminating taxes. The ones that are financially strapped are actually raising taxes.”

Aside from California, Illinois raised its income tax rate 66% in early 2011.

Experts say it’s difficult to tell whether the talk of tax cuts is having any effect on municipal bonds, which are currently in such demand that the pricing would be strong in any case. A lot of investors are moving their money out of money market mutual funds, and as a result, municipals enjoyed $574 million in net inflows at the end of January, the fourth consecutive week of net additions.

“This market moves on supply and demand, and right now the demand for munis is strong, because of the increase in the marginal tax bracket, the medical surcharge, and munis are still very attractive when compared to taxable equivalents,” Heckman says. “We don’t have enough new paper issuance to meet that level of demand that’s out there. And we really don’t see that changing much.”

States that cut taxes may be able to make up for the lost revenue by raising money elsewhere. Connecticut, for instance, recently suggested tolling more highways. Pennsylvania passed a law that takes $450 million a year from the Turnpike Commission and puts it toward transportation projects across the state.

States with energy resources like oil and gas are looking to replace income tax revenues with extraction taxes, drilling leases and royalty payments. Gov. John Kasich of Ohio, for instance, has proposed using such revenues to finance income tax cuts.

The key is to make sure states replace the revenues they’ve lost, and if it’s going to be with a new tax, best to have one that isn’t too volatile. But if they just eliminate income taxes and do nothing else, obviously, they will have less money, says Donald B. Cummings Jr., the managing partner of Blue Haven Capital in Chicago.

“The details must be worked out. Every state is looking at it differently,” Cummings says.

He remembers back in the ’80s when Georgia announced it would lower its income taxes. Its bonds were rated ‘AAA’ at the time. State officials said they had enough money to reduce the taxes, and they did. It worked, Cummings says.

“And their ratings are still good. It was really something. I remember reading the article and thinking, ‘Holy smokes!’ This is completely the opposite of what I’d expect out of big government.”

Indeed, in the 25 years since then, he hasn’t seen another state do it. Until now, it’s all been talk.

“I think people are worried, because even if the numbers are correct, even if they lose X amount of dollars but they pick it up in sales tax, what’s the lag period?” he says.

Most states considering an income tax cut talk of raising their sales taxes. Assuming the increase in one tax matches the cut in the other, such a move is revenue neutral from a bond standpoint. But it’s another story from a fairness standpoint, experts say. Some argue it makes more economic sense to put the higher tax on the poor, because if you overtax the wealthy, they’ll simply move, and you’ll bring in less tax revenue.

According to Jason Sorens, a political science professor at the University of Buffalo, there’s a little bit of evidence that higher earners are more likely to consider the tax burden when deciding where to live, but there’s also evidence that poor people consider both the benefits available and the taxes they face.

“Everyone looks at taxes to some degree,” he says.

Sorens says there are actually a lot of factors that go into a person’s decision on where to live. Taxes are just one. Climate is another. Housing prices are yet another.

“Texas, for instance, is on the low side on the tax burden, but its taxes are not nearly as low as Tennessee and New Hampshire,” Sorens says. “And yet it attracts people because the cost of living is cheap.”

For the time being, the worry in the municipal bond market is not that states will try to cut their taxes but that the bonds will lose their tax-exempt status, which could hurt local and state issuers, not to mention taxpayers, says Mike Nicholas, CEO of the Bond Dealers of America, a trade association representing fixed-income dealers. President Obama has already suggested taxing the bonds retroactively on two occasions already—in the American Jobs Act he proposed last year and in his budget, Nicholas says.

“That’s the 800 pound gorilla in the room,” Nicholas says. “It seems ridiculous, and it seems unconstitutional, and it will open up a whole can of worms, but it doesn’t mean it’s not going to happen.”

One of the plans under consideration by the federal government is to tax municipal bonds prospectively—meaning the interest income on investors’ current holdings would continue to be tax free, but not on the bonds issued in the future. Another plan is to make the bonds taxable retroactively. That’s not to say people will be presented with tax bills if they hold municipal bonds now. But bonds already issued and sitting in peoples’ portfolios might suddenly be taxed going forward.

“Something is going to be done to restrict tax-exempt financing. It’s just a question of what,” says J. Hobson “Hobby” Presley, a veteran public finance attorney based in Birmingham, Ala. “In general, I’d say in the first half of this year, we’re likely to see the outlines of some deficit reduction deal that should reveal the course of tax-exempt bonds.”

The rating agencies have not yet weighed in on the issue, but if something passes, they certainly will, says Presley, the former president of the National Association of Bond Lawyers. “If they were to remove the ability to issue tax-exempt bonds altogether, that would have a real negative impact on the credit of every state and local issuer, because it means their borrowing costs will be significantly higher,” Presley says.

According to the Bond Buyer Index, if tax exempt issuers had to borrow in the taxable market, a ‘AA’ credit now paying about 3.74% in the municipal bond market would likely have to pay about 5.667%, Presley says. The result is that they’re either going to borrow less and reduce their infrastructure investment, or they’ll be forced to raise taxes to cover the increased borrowing costs.

“This could ultimately become a serious credit issue,” he says. “But I haven’t seen much discussion of the credit issue so far.”