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Research desk reports: Do millionaires flee high-tax states?

By Dylan Matthews

Dbfclark asks:

Vis a vis the discussion on Yglesias and Delong about whether tax rates are causing high-income earners to migrate from high-tax states to low-tax ones: Is there any statistical evidence that this is going on, and if so, what is it?

The Center for Budget and Policy Priorities, which is really stellar on state tax issues, has put together a list of relevant studies on this question. All of them find that the effects of migration between states of higher taxes are minimal:

1) Economist Andrew Leigh did a national study (PDF) looking for effects of state income tax rates on migration patterns. He could not find a statistically significant relationship.

2) After Maryland instituted higher tax rates on wealthy individuals in 2007 and 2008, tax returns from millionaires dropped. But the Institute on Taxation and Economic Policy found (PDF) that the drop was not due to millionaires leaving, but to the recession making them no longer millionaires.

3) The California Budget Project notes (PDF) that California imposed a temporary tax increase on high earners from 1991 to 1995, and the number of millionaire filers increased by 33.4 percent. Another high-income tax hike was implemented in 2005, and the number of millionaire filers increased by 37.8 percent.

4) New Jersey increased taxes on high earners in 2004, and Princeton researchers did find (PDF) that New Jersey lost $37.7 million in tax revenue after migration by wealthy tax payers. However, that number was dwarfed by the more than $1 billion overall revenue gain from the tax increase, and the number of high-income filers still increased between 2004 and 2006.

As the New Jersey numbers suggest, it would be going too far to say that state tax rates have no effect on cross-state migration. However, you have to balance that against evidence that the revenue generated by state tax increases on high earners overwhelms that lost from taxpayers' leaving.

By Ezra Klein  |  June 18, 2010; 1:09 PM ET
Categories:  Taxes  
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One of the biggest mistakes liberals make when dealing with any economic issue is they forget that economics is not a business science, but is a social science....a study of how people react.

Change the variables and people will react differently.

Don't be shocked

Posted by: WrongfulDeath | June 18, 2010 1:21 PM | Report abuse

It's on a curve. Moving is a big deal. People aren't going to move just because their tax rate goes up incrementally over time, especially if they have a lot of money.

If a given state raises tax rates by 5% and 10%, and then does so again, then lots of people will move out of obligation, rather than preference. State income tax rates of 80% would cause even the most intransigent, rooted folks to consider moving to a more friendly locale.

Buit it depends. People who are (and feel) more mobile relocate much sooner than people who feel that clients, family, church and so on keep them locked to where they live. Wealthy folks often depend on the local business network, and you can't take that with you when you leave.

Posted by: Kevin_Willis | June 18, 2010 1:24 PM | Report abuse

Another important thing to think about when comparing the results from California and New Jersey is that wealthy residents are much more likely to move away from a state if they can continue to live in the same metro area (i.e. keep their current job). In other words, wealthy residents in the NYC, Philly, and DC metro areas are more likely to move to avoid high state taxes than people in Houston, Phoenix, or L.A.

Philadelphia imposed a city-wide wage tax, and from my understanding, it's had pretty awful consequences with a lot of businesses relocating in adjacent suburbs.

I've followed this mobility research pretty closely and taxes are pretty far down the list of reasons that people move. Good job markets, proximity to family, weather, and other differences in the cost of living are all much more important than taxes.

Posted by: al444 | June 18, 2010 1:27 PM | Report abuse

Also, there's an opportunity limitations. Your high tax state isn't the only one, so you have to exclude all those other high tax states. Also, certain states my not tax at the level of New Jersey, but may be there in 10 years. If you're going to move, you probably don't want to move to any of those. Then you have to look at the overall cost of living. Then the overall quality of life. There are a lot of factors to moving. A low income tax state may have high property taxes, or a high capital gains tax. How will that effect you?

There's probably a lot of room to raise taxes before the millionaires start running away.

Posted by: Kevin_Willis | June 18, 2010 1:29 PM | Report abuse

There are non-monetary costs as well.

We need to think of those millionaires' souls.

By depriving the Elect of some moiety, however small, of the outward signs of their election, and elevating our fallible, human, tax tables over the perfect wisdom of the Lord, we are eroding confidence in the dispositions of the Almighty, while increasing the numbers of our fellows who now will live in new-found fear and trembling, lest they be one of the preterite damned.

You don't want to provide your richer neighbors with an occasion to fall into the sin of despair, do you?

Progressive taxation -- not just bad policy, but heresy!

Posted by: davis_x_machina | June 18, 2010 2:18 PM | Report abuse

Not only is moving ones home difficult, but so, often, is moving a business. CA taxes income generated in CA, even if the taxpayer has decamped to Montana or some low tax paradise. Sure, with the internet some businesses can be run from anywhere, but there are those that require a large, educated workforce and the proximity of universities and research facilities. This is, of course, something CA seems bent on undermining through failure to support adequate taxes, but previous generations did build up quite a lot of social capital and other resources for us to squander.

Posted by: Mimikatz | June 18, 2010 2:53 PM | Report abuse

Intuitively, al444's observation makes sense: if residents are able to move states while remaining in the same metro area, migration is much more likely. Thus, a millionaire tax would probably be more effective in California or Florida than in New Jersey or Maryland.

Posted by: mikehoffman82 | June 18, 2010 3:39 PM | Report abuse

Your paper recently described a relevant natural experiment: given the variations in taxes between DC and MD, do the houses on either side of Eastern and Western avenues vary in price depending on the state they're in? The article, if I remember, said: no, not noticeably.

Posted by: bharshaw | June 18, 2010 3:42 PM | Report abuse

I agree! Tax lower-wage "earners" and reduce taxes on those who generate actual, reportable income: the benefits will be staggering! Simply collecting the tax due from tipped restaurant employees might be a start: if every restaurateur was simply required to report cash in and cash out on each employee, would it benefit the growing government?

Posted by: rmgregory | June 18, 2010 4:23 PM | Report abuse

If migration were a common or feasible response to changes in tax rates, we wouldn't see so much anger amongst the risk about changes in tax rates. If you're a multi-millionaire the cost of moving to a new location should be inconsequential.

The fact that people get so upset implies there are other factors locking them in at all levels of government.

Posted by: zosima | June 18, 2010 8:46 PM | Report abuse

The liberal mind:

- people want gov't to spend more

- people and businesses want to pay more taxes

- high taxes attract businesses and rich people

- global warming is a fact, not a fraud

- tea partiers bigger threat than al qaeda

- Obama's experience as community organizer helps him today

Posted by: johnhiggins1990 | June 20, 2010 12:10 AM | Report abuse

Research Desk:

You and others have recently questioned the value of FHA backed home loans. Has anyone done a cost/benefit analysis of this social program? In other words, how much would loans cost without this backing vs. how much tax dollar we spend on this program.

Whether the government should be involved in the housing market is one question, whether those programs are effective is another.

Posted by: smphilips | June 20, 2010 5:17 PM | Report abuse

People like to say they will move as a way of venting - it tends to be an empty threat, like

"Hurry up and lower my taxes or we're going to leave without you!"

Posted by: HalMorris | June 20, 2010 10:28 PM | Report abuse

The tax rates in this country are immorally low. From 1944 through the 1960's the top marginal tax rate in this country averaged nearly 90%. The country did just fine. They were among the most prosperous economic years in our country's history, which completely disproves all the theories that high taxes are bad. All this complaining about high tax rates that are well below 50% is ridiculous. The ultra-wealthy should be paying around 90% of their income out as taxes. Right now they are not paying anywhere near their fair share.

Posted by: KGivens | June 21, 2010 12:06 PM | Report abuse

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