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Do State Millionaire Taxes Drive Out the Rich?

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In an effort to generate some much needed revenue, many states have created new tax brackets or surcharges aimed at high-income individuals.  These new taxes have been dubbed "millionaire taxes" and are becoming a new trend in state taxation.  

Millionaire Tax States See Increased Revenue

According to a study by the Rockefeller Institute of Government, millionaire taxes have worked out well for several states.  New York and California have both seen an increase in state tax revenue as a result of tax hikes on the rich.  According to the Rockefeller study, in the first quarter of 2010, New York’s tax revenue rose by 15.8 percent and California’s increased by 19.1 percent compared to the same period in 2009.  The study also showed that New Jersey and Hawaii, two states that increased tax rates on the upper class, had a surge in tax revenue in the first quarter of 2010.  It’s no surprise that increasing tax rates increases revenue, but the question is will the millionaires stick around to pay the high taxes.  And if some do leave will the increased revenue be enough to cover the potential losses from out-of-state migration?

Taxing Millionaires Drives Them Out

The main argument against the millionaire tax is that millionaires will abandon their home state when their taxes increase, which would actually decrease state revenue and leave the middle class to make up the losses.  They argue that punishing the successful makes the state less attractive to business, driving not only millionaires out of the state, but their businesses and employment opportunities with them. 

In May 2009 the Wall Street Journal ran an editorial entitled "Millionaires Go Missing."  This article argued that Maryland’s newly imposed millionaire tax was driving wealthy citizens from the state.  The article claimed that one-third of millionaires left Maryland after the state increased their top tax rate from 5 percent to 6.25 percent for taxpayers making $1 million or more.  However, a study that used actual state tax return data contradicts this claim.  

Are the Millionaires Really Leaving?

According to a study by the Institute on Taxation and Economic Policy (ITEP), the decrease in Maryland millionaire tax returns had less to do with millionaires leaving the state and more to do with the recession’s effect on their income.  The institute gathered data from the Maryland Office of the Comptroller on millionaire tax returns from before and after Maryland's 2007 tax hike.  Their findings showed that out of 3,837 less millionaire tax returns filed in 2008 compared to 2007, only 547 of them were due to state residency changes.  The other 3,290 millionaires simply made less money during the recession and were therefore not subject to the millionaire tax.  

Other studies have resulted in similar conclusions.  Princeton University’s Policy Research Institute studied the effects of New Jersey’s “half millionaire” tax that was passed in 2000.  This “half millionaire” tax created a new tax bracket for those making over $500,000 a year.  The study found that while some out-migration did occur, the increase in tax revenue more than made up for the losses.  New Jersey lost $37.7 million in tax revenue after wealthy taxpayers left the state, but they gained over $1 billion in revenue from the tax increase.  A similar study by the California Budget Project found that after the state passed a 1 percent surcharge on people making more than $1 million a year in 2005, the number of taxpayers with adjusted gross incomes of at least $1 million increased by nearly 38 percent.

It seems that maybe there are more factors in deciding where to live than just taxes, even for the rich.

 

More information:  See which states have enacted millionaire taxes, summary of state income tax changes for 2009 and 2010

 

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