If states raise income taxes on high-income households, the wealthy won’t flee, according to a new report from the Center on Budget and Policy Priorities (CBPP). According to the report, many factors influence people’s decisions to move, but state taxes do not appear to be a main driver for most people.
An income tax increase for high-income Minnesotans was debated throughout the recent legislative session and state government shutdown. Polls indicated a majority of Minnesotans favored a balanced approach of new taxes and spending reductions. This approach would protect critical priorities, including the state’s schools and universities, health care, and services for seniors and people with disabilities. The Legislature rejected any new revenues, particularly a new tax bracket on the highest-income Minnesotans. Critics argued that, in response to a tax increase, the state’s highest-income residents would leave and take their tax dollars with them.
Available research does not support such arguments. The CBPP report found that taxes had little impact on decisions to move. The report particularly looked at three states that recently increased taxes on high-income households.
- New Jersey: Impact of tax increase was “close to zero.” In 2004, New Jersey increased its income tax on households with incomes above $500,000. It was the largest tax rate increase on high-income households passed by any state during the seven-year period studied. A study published in the National Tax Journal found that the tax increase’s impact on whether high-income households moved out of state was “close to zero.” There was an increase in the migration rate of households subject to the tax increase, but there was a similar increase in the migration of high-income households who were unaffected by the tax increase.
- Maryland: No millionaire flight, just a bad recession. After Maryland’s 2008 millionaire’s tax, the number of Maryland millionaires dropped. Examination of tax data showed that the vast majority of millionaires did not leave Maryland – rather, they were still in the state, but the national recession had pushed their incomes below $1 million.
- Oregon: Study ignores key facts. In 2009, a business-backed study said that higher-income Portland-area residents moved to Washington State, which has no income tax, to avoid Oregon’s income tax. Among the study’s flaws, it ignored the fact that Oregon taxes wages of people working in Oregon even if they live out of state. Oregon workers could not avoid paying Oregon state income taxes by moving to Washington.
Interstate moves are rare for households at any income level. Between 2001 and 2010, just 1.7 percent of U.S. residents moved between states annually. The CBPP finds that “a large body of scholarly evidence shows that they do so primarily for new jobs, cheaper housing or a better climate.” Those most likely to move include people who are unemployed and those between ages of 18 to 24, neither of which is a high-income group. In deciding if and where to move, taxes are unlikely to overcome such factors as job, home, family, friends, or community.
Tax increases on Minnesota’s high-income households would not have the negative impact that opponents predict—and rejecting these tax proposals will hurt the state.
Pursuing a low-tax, low-services strategy will make it more difficult for the state to remain competitive. Minnesota needs to maintain high-quality education, health care, and other public services to retain current residents and attract new ones.
A new tax on Minnesota’s highest-income households would bring their taxes paid as a share of income more in line with what other households pay. On average, Minnesota households paid 11.5 percent of their income in state and local taxes in 2008, while the top one percent – those with incomes over $429,000 – paid 9.7 percent, according to the Minnesota Department of Revenue.
Minnesota’s recent budget deal did not solve the mismatch between what our tax system raises and what it costs to fund our state’s priorities. Policymakers are projected to face a $1.9 billion deficit when they seek to pass the next state budget in 2013. A targeted tax increase on Minnesota’s highest-income households should be part of the solution.