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The Flawed “Evidence” for the Tax-Flight Myth

August 5, 2011 at 1:37 PM

As we explained yesterday, the claim that a state can’t boost revenues by raising taxes on upper-income people because they will just flee to lower-tax states is a myth.  Those who propagate it frequently cite statistics that can sound convincing but are fundamentally flawed.

Take Oregon, where in 2010 a business-backed study predicted that a recent tax increase on upper-income households would drive affluent taxpayers out of the state.  As evidence, the study claimed that Portland residents had been moving to nearby Washington State because it has no income tax.  But the study didn’t account for a local boom in Portland that had caused housing prices to rise faster there than in Washington.  Any migration was likely prompted by housing price differentials (and other factors) more than tax differentials.

Similarly, in New Jersey, policymakers and lobbyists were so determined to find a taxes-migration link that they cited a study that has nothing to do with taxes.  In 2010, Boston College’s Center on Wealth and Philanthropy issued a report on the impact of changing demographics on charitable giving in New Jersey.  It showed that starting in 2004, many more millionaires left New Jersey than moved to it, a sharp change from previous years.  Some, including Governor Chris Christie, blamed the change on the state’s 2004 tax increase on incomes over $500,000.

But these critics overlooked one big problem:  the study focused on people with a net worth of $1 million or more, most of whom had much less than $500,000 a year in annual income — which means the tax increase didn’t affect them.

A thorough study of the tax increase found that any “out-migration” it might have caused cost the state only around $16 million in tax revenue between 2004 and 2007, a drop in the bucket compared to the $3.8 billion in revenue the state gained from the tax increase over those years.

Finally, in Maryland, some have blamed the precipitous 2008 drop in the number of tax filers with incomes over $1 million on the “millionaire tax” that the state enacted that year.  “Millionaires flee Maryland taxes,” one headline blared.  But an examination of actual tax return data shows that the vast majority of this decline occurred not because people left the state, but because their incomes fell below $1 million due to the recession and stock market crash.  They remained on the Maryland tax rolls, but in a lower tax bracket.

The fact is, contrary to all the scare talk, raising taxes won’t spark a large migration out of a state, any more than cutting taxes will entice a big influx of people into a state.  Tax flight is a myth.