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Millionaire Tax Flight Myth Debunked — Again

May 26, 2016 at 4:45 PM

An important study published today conclusively debunks the myth that raising state income taxes on the wealthy causes many of them to flee to lower-tax states.  It also shows that repealing state income taxes — a change the American Legislative Exchange Council (ALEC) and others are promoting across the country — likely won’t attract rich business owners and workers with sought-after scientific and technological skills, let alone average families.

“The most striking finding of this research is how little elites seem willing to move to exploit tax advantages across state lines,” write the authors, Stanford University sociologists Cristobal Young and Charles Varner and Treasury Department economists Ithai Z. Lurie and Richard Prisinzano.  “[S]tate . . . governments have considerable leeway for independent tax policy,” they conclude.  “States can make policy choices that contribute to the reduction of inequality.” 

Unlike earlier studies on whether state taxes affect high-income people’s moves, which were based on limited data, the new study examined every federal tax return with more than $1 million in reported income filed in every state from 1999 through 2011.  To isolate the effects of income taxes, the authors held constant other potential factors, such as climate and housing costs. 

Here are four of their key findings.

  • Income taxes have only a tiny impact on millionaires’ moves.  If the average state raised its income tax rate on millionaires by one percentage point and all other states kept their rates constant, 12 fewer millionaires would move into the state and 11 more would move out, the study estimates.  That’s 23 moves, compared to 9,000 existing millionaire households in the average state.  Only 2.2 percent of current millionaire interstate moves have any income tax motivations whatsoever, the study estimates.  These facts strongly suggest that no state would lose revenue by raising income taxes for millionaires.
  • Florida’s the only state for which there’s any evidence that low income taxes even slightly attract millionaires.  There’s no effect at all for any other states without income taxes.  That’s important because ALEC’s annual Rich States, Poor States report claims that any state can attract better-educated, high-income workers by cutting or eliminating its income tax.  This claim inspired Kansas’ disastrous income tax cut “experiment” and has encouraged harmful income tax cuts in states like Missouri, North Carolina, Ohio, and Wisconsin.  If no state except Florida has seen any impact, as the study concludes, no other state considering income tax elimination can expect to do any better. 
  • Millionaire business owners are even less likely than other millionaires to move in response to interstate differences in income taxes.  Presumably that’s because their incomes are even more closely tied to the networks of customers, employees, investors, and suppliers they’ve built over the years.  This finding, which echoes other research, shows the futility of trying to lure business owners with income tax cuts.
  • Income taxes have no statistically significant impact on non-millionaires’ moves.  That’s consistent with the evidence in our 2014 report, including roughly a dozen earlier academic studies.