Building an Economy that Works for Everyone

Does an income tax mean more millionaires will move in?

Whenever the idea of a state income tax is brought up in Washington, you’ll often hear some variation on this theme: “Watch out, the rich will leave if you raise taxes!” The latest iteration is Arthur Laffer and Stephen Moore’s column in today’s Wall Street Journal. The authors cite New Jersey, among other states, as emblematic of this problem — but they’ve overlooked a small detail shown in this little study from Princeton:

New Jersey’s net domestic out‐migration is primarily occurring at the bottom end of the income distribution level. Below the state’s median family income, there is a net loss of 26 people for every 100 out‐migrants. However, above New Jersey’s median income, there is a net gain of 5 people per 100 out‐migrants.

We note that in spite of net out‐migration, the number of half‐millionaires in New Jersey has increased sharply in recent years, from 26,000 in 2002 to 44,000 in 2006 (a 70% increase). Income growth among high earners has led to a tremendous increase in the number of people who fall into the half‐millionaire tax bracket. Using New Jersey tax records, we estimate that the new half‐millionaire tax rate has generated an average of $895 million per year in tax revenues, rising from $739 million in 2004 to over $1 billion in 2006.

State income tax policy does not explain why people are moving out of New Jersey… . While New Jersey has, for a long time, experienced net domestic out‐migration, this is not a symptom of economic decline in the state. On the contrary, out‐migration is largely a consequence of regional inflation in the cost of living that makes New Jersey difficult to afford for lower‐income residents.

When real wages don’t keep up with the cost of living (like this), middle- and low-income families have to move to someplace cheaper to live. Wealthy households have the luxury of being able to choose where to live, regardless of cost.

Anyone who has run a business or balanced a checkbook knowns people are willing to pay more for something they perceive to be of value. Laffer and Moore’s “the rich will run away” red herring masks the logical fallacy that a community with low taxes, overcrowded schools, dilapated roads and pollution is somehow more “attractive” than one with higher taxes and good public K-12/university systems, modern transportation systems, decent health care, and clean places to play and exercise like bike trails, parks, etc.

UPDATE: Policy Matters Ohio reports that over a 15-year period between 1988 and 2003:

Ohio made two major changes to its income tax structure that would be likely to affect migration if income taxes were a major factor in location decisions. In 1993, Ohio added a top tax rate of 7.5% on income of $200,000 or more. Between 1996 and 2000, a temporary income tax cut was in place, which returned more than $2.2 billion to taxpayers during those years. Thus, if income taxes were a significant factor in such decisions, we might expect outward migration to have increased between 1993 and 1996, and to have decreased between 1996 and 2000.

In fact, outward migration does not correspond to these predictions.

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