Studies debunk myth that the rich flee states with higher tax rates

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Monday, May 02, 2011 at 2:55 pm

Fiscal conservatives have long cited anecdotal and inconclusive evidence that state tax hikes send the rich running to states whose tax policies are more sympathetic to their pocketbooks. Two new academic studies, however, poke holes in such theories.

NPR’s Robert Smith reports on research from Jeffrey Thompson, an assistant research professor at the University of Masachusetts-Amhert’s Political Economy Research Institute, and Cristobal Young and Charles Varner, sociologists at Stanford and Princeton Universities.

Thompson’s study (PDF), published in April, is a statistical analysis of migration trends in New England, as compared to state tax rates in the region. Thompson concludes that while high tax rates may make a given state less appealing for people already planning a move, there is little to no evidence that people leave states when taxes go up. He writes:

The vast majority of households that move to a different county or state indicate employment, family, and housing-related matters are the main reason behind their move.

The limited available research on the impact of taxes on cross-state migration suggests that taxes do not play a very important role.

Thompson writes further that on an individual level, those with higher incomes tend to have stronger financial and community ties to where they live, discouraging interstate emigration. Back on the statewide level, the decrease in migration to a high-tax state is actually vastly offset by increased revenue from high taxes, resulting in net benefits to the state economy and job market:

States raising taxes will see somewhat fewer migrants choose their state as a destination, but offset and reverse this impact when they use increased tax revenues in ways that attract people and create jobs. Because the migration impacts of unemployment are so much greater than for taxes, when states use additional revenue to create jobs and lower unemployment, the net effect is to decrease out- migration and attract more people to the state.

Young and Varner’s study (PDF), set to be published in next month’s edition of the National Tax Journal, examines the consequences of New Jersey’s so-called “millionaire tax,” a 2004 tax increase of 2.6 percent on any New Jerseyite making more than $500,000 a year. Young and Varner found that not only did those hit with the tax not leave in any significant numbers, but that earners making just below the $500,000 cutoff left at about the same rate, suggesting that even among top earners who’ve moved from New Jersey since 2004, taxes have had very little impact on their decisions to do so.

The paper bolsters evidence from a 2009 study in which Princeton demographer Douglas Massey showed that, at most, 0.7 percent of those affected by the “millionaire tax” had left the state for tax reasons since 2004. While their departure cost New Jersey $38 million in annual revenue, the money collected from the remaining 99.3 percent has added nearly a billion dollars a year to New Jersey’s coffers. The net economic gain from instituting the tax has been an average of $857 million a year.

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