Lower taxes for millionaires in more conservative states and higher taxes in more liberal places didn’t spur the rich to move to red states in large numbers, a recent report found, demonstrating the viability of raising taxes on the wealthy.
The paper, published late last month, was authored by Cristobal Young of Cornell University and Ithai Lurie of the U.S. Department of the Treasury and released by the Washington Center for Equitable Growth.
The study examined two recent events in an effort to determine whether tax flight — the claim often deployed by fair taxation opponents that the wealthy will leave for other places if rates are raised — should be of significant concern to policymakers.
The first event examined was the tax cut package passed by Congress in 2017 and signed by then-President Donald Trump that slashed rates for many wealthy people, including those in Maine, at the expense of low-income residents. However, because the bill capped what is known as the state and local tax deduction, millionaires in some places where that deduction is most used — typically liberal-leaning states such as New York and California — actually saw their taxes go up. This created a situation where taxes were cut for millionaires in more conservative states, such as Texas and Florida, but raised for the wealthy in some blue states, the paper explained.
The authors used the situation to study whether millionaires in blue states where taxes went up after the 2017 law moved en masse to red states where tax liability had gone down.
The result? Millionaire migration remained essentially the same before and after the tax law, demonstrating that higher taxes for the rich in some states did not result in a mass exodus.
The report did find that millionaires who had already decided to move were incrementally more likely to go to lower tax states. However, the authors didn’t find that higher taxes alone motivated the rich to pack up.
“In other words, taxes do not affect the decision to move, but, conditional on moving, they do influence the choice of destination,” they wrote.
The authors then incorporated their estimates of millionaire tax migration into a model that calculates the best tax rate on the rich to maximize revenue that helps pay for critical public services. From that, the report identified an optimal tax rate — when combining federal, state and local taxes — of 66% for the wealthy, which is much higher than any state’s current top rate.
“This means that if states cut taxes in an effort to attract millionaires, the revenue losses would far exceed the gains,” the authors warn.
The second event the paper examined was the fallout from the COVID-19 pandemic, which has disrupted a number of socioeconomic factors that tie people to certain locations. The paper referred to this phenomenon as “diminished embeddedness.”
The authors found that the diminished embeddedness caused by the pandemic did result in a rise in the wealthy leaving high-tax states. Going forward, taking steps to increase the social and cultural ties that affect whether someone is embedded in a place could minimize the risk of tax flight if lawmakers pass policies to ensure the rich pay their fair share, the report stated.
“When social ties are strong, fiscal and financial incentives have a smaller playing field and less influence on individual behavior,” the authors argue, adding that “embeddedness allows states to experiment with new fiscal policies without risking elite exodus or a deep loss of their tax base.”
This mirrors research conducted by the Maine Center for Economic Policy (MECEP) in 2018. That study found that wealthy Mainers are less likely to move out of state than the lowest income people and that the state’s rich are a “stable, reliable tax base.” MECEP also identified that New Hampshire — a state with no income tax — lost more residents to Maine than vice versa from 2000-2016, putting another dent in the notion of tax flight.
Although the MECEP report was published prior to the pandemic, research by the Center on Budget and Policy Priorities from 2020 found that making the wealthy pay their fair share in taxes would supercharge the economic recovery from COVID-19 of Maine and other states, providing additional evidence for upping taxes on the rich amid the public health crisis.
Still, despite having Democratic majorities in Augusta and a Democrat in the Blaine House, that has proven to be a tough sell in Maine political circles, as Gov. Janet Mills has pledged not to raise taxes despite some energy in the legislature for making the wealthy pay their fair share.
Photo: Mainers rally in Augusta in 2019 for a fair tax code | Beacon
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