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Tax-Flight Arguments (Still) Don’t Add Up

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Two governors are proposing this week to raise taxes on their state’s wealthiest residents.   Today, Minnesota’s Mark Dayton proposed higher income tax rates on taxable incomes above $150,000 and a surtax on incomes over $500,000; tomorrow, Connecticut’s Daniel P.  Malloy is expected to propose a higher rate on incomes over $1 million.

Some critics will surely claim, as they have in other states, that higher-income people will flee from the state.  No such flight has occurred in other states that raised top rates, but that won’t stop these attacks, as some recent examples show:

  • A Bloomberg News story headlined “New Jersey Population Growth Slows as Taxes Push Some to Flee” noted that the Garden State’s population grew much more slowly between 2000 and 2010 than most other states.  It suggested that New Jersey’s top income tax rate — now 8.97 percent — was to blame.But the 8.97 percent rate affects only a tiny share of New Jersey filers — the 1.2 percent with taxable incomes over $500,000 — and those folks aren’t leaving.  Quite the contrary,  there’s strong population growth within that bracket:  during roughly the same time period (1999-2008), the number of New Jersey filers with incomes over $500,000 grew by more than two-thirds.

    As two Princeton University researchers, Cristobal Young and Charles Varner, conclude in a new report on a 2004 measure that set the 8.97 percent rate:  “While in principle it is easier for tax avoiders to migrate out of state than out of country, the reluctance of people to do so gives states significant room to tax top incomes.  Indeed, we estimate that New Jersey’s new tax raises nearly $1 billion per year, and tangibly reduces income inequality, with little cost in terms of tax flight.”

  • A Connecticut Policy Institute report contends the state’s top income tax rate of 6.5 percent is causing residents to flee.  But as Robert Frank pointed out in the Wall Street Journal, the state’s population of top-income households is growing, not shrinking (as in New Jersey).  And many of those who leave go to New York, where tax rates are higher.
  • An Ocean State Policy Research Institute report claims that Rhode Island’s estate tax (which applies to estates worth more than about $850,000) is the main driver of out-migration from the state.  But the report’s spurious reasoning earned it a “false” rating from PolitiFact Rhode Island and a stinging rebuttal from The Poverty Institute of Rhode Island.  Among other problems, the study argues that many residents are fleeing Rhode Island for Florida because the latter lacks an estate tax, even though the number of migrating residents actually fell in the years after Florida eliminated its estate tax.

States are addressing huge, recession-induced revenue shortfalls by cutting everything from kindergarten funding to services for Alzheimer’s patients — and more deep cuts are on the way.  Policymakers should ask those who can best afford it to pay somewhat more, solid in the knowledge — and despite assertions to the contrary — that they won’t flee from higher income taxes.  In short, policymakers should base taxes on the cost of meeting real needs, not on unfounded fears.