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Studies: Rich Don't Flee High-Tax States
When New Jersey Gov. Chris Christie was presented with a new state tax on the wealthy, he vetoed it. He said:
You're not going to fix this tax situation by continuing to load more and more taxes onto people who have both the ability to leave the state and the inclination to leave the state if they feel as if they are being treated unfairly.
It's not just Christie. Democratic governors in New York and Maryland recently dropped extra taxes on the wealthy from their budgets, citing the same concerns.
But two new studies show there is little evidence that the rich flee high-tax states.
"Taxes [have] essentially no impact on causing people to leave a state," says Jeff Thompson, of the Political Economy Research Institute at the University of Massachusetts, Amherst.
In a study tracking 18 years of migration between states in New England, Thompson found that people mostly move for job-related reasons. They go where the jobs are, regardless of whether it's low-tax New Hampshire or higher-tax Maine.
"If you're living in a state and your tax bill goes up by a thousand or two thousand dollars," he says, "that ... pales in comparison to what it would cost you to actually move. And it might not be worth it to have to be farther away from your job, farther away from your friends."
And Thompson says the stickiness of where you live is just as strong for those with higher incomes. In fact, they often have bigger houses, and businesses they can't move, and more ties to a community.
So why the persistent idea that the rich are ready to pack up at a moment's notice if state taxes get bumped up?
Part of it is the power of anecdotes.
People move all the time. People complain about taxes all the time. And sometimes those people are famous economists — like, say, Arthur Laffer.
"I left California and I moved to Tennessee, because Tennessee has no income tax," Laffer tells me.
Laffer is famous in part for the Laffer Curve, which describes the way higher taxes can cause people to work less, which in turn can lower the amount of tax revenue the government takes in.
"Those states with no income tax have grown a lot, lot faster than those with the highest income tax rates," Laffer says. "So it's not just the rich who move. But the businesses move as well, and then the workers go with them."
But just because there are people moving out of New York and California and New Jersey, you can't automatically blame taxes. A lot of those low-tax states have sunny weather, cheap land and relatively healthier economies. It's a complex equation.
What researchers needed was a natural experiment to tease out the influence of taxes. And they found just such an experiment, in Chris Christie's home state of New Jersey.
In 2004, New Jersey increased taxes on income over $500,000 by 2.6 percent. And what happened?
"The vast, vast majority just don't respond to the tax. They stay put," says sociologist Charles Varner of Princeton University.
Varner compared people who were just under the line for the new tax — who made, say, $400,000 a year — with those who suddenly had to pay more taxes.
According to Varner's study, both groups moved away from New Jersey at the same rates.
"The effect on migration is minimal," he says.
Varner says there may be plenty of reasonable arguments for avoiding new taxes on the rich. You can argue that new taxes aren't fair. You can argue that they affect investments in new businesses. But a mass exodus? So far, no one has proved it.
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STEVE INSKEEP, host:
Now, when states get into budget trouble, one suggestion often comes up. Why not raise taxes on the highest earners - the so-called millionaire's tax? But that rarely gets very far. Politicians argue that the rich will simply move to another state if they have to pay more taxes.
Now, a new series of studies suggests there's little evidence that the rich really migrate. Robert Smith, from NPR's Planet Money team, has more.
ROBERT SMITH: The rich are different from you and me. They have planes and multiple homes, and financial advisers like Jim Trippon, showing them how much they can save by crossing state lines.
Mr. JIM TRIPPON (Financial Adviser): If you live on the west side of Lake Tahoe, in the state of California, you're paying 11 percent. If you live on the east side of Lake Tahoe in the state of Nevada, you pay zero. Well, that's a pretty easy decision to make.
SMITH: This logic is frightening for governors. When New Jersey's Chris Christie was presented with a new state tax on the rich, he vetoed it.
Governor CHRIS CHRISTIE (Republican, New Jersey): As I said before, you're not going to fix this tax situation by continuing to load more and more taxes onto people who have both the ability to leave the state, and the inclination to leave the state if they feel as if they're being treated unfairly.
SMITH: And it's not just Republicans like Christie. Democratic governors in New York and Maryland recently dropped the millionaire's tax from their budgets, citing the same concerns. The problem is, there's no convincing evidence to show that the rich leave en masse when taxes go up.
Professor JEFF THOMPSON (University of Massachusetts, Amherst): Taxes play, essentially, no impact on causing people to leave a state.
SMITH: Jeff Thompson. He's an economist at the Political Economy Research Institute at the University of Massachusetts, Amherst. He has a new study tracking 18 years' worth of migration between the states of New England. And he found that people mostly move for job-related reasons.
Prof. THOMPSON: If you're living in a state and you face - you know, your tax bill goes up by a thousand or two thousand dollars, you might not be too happy about it, but that one or two thousand dollars pales in comparison to what it would cost you to actually move. And it might not be worth it to have to be further away from your job, further away from your friends.
SMITH: And Thompson says the stickiness of where you live is just as strong for those with higher incomes. In fact, they often have bigger houses and businesses they can't move, more ties to a community. So why the persistent idea that the rich are ready to pack up at a moment's notice if state taxes get bumped up? Part of it is the power of anecdotes. People move all the time. People complain about taxes all the time. Often, the complainers are the ones moving. And sometimes, that complainer with a U-Haul is even a famous economist.
Mr. ARTHUR LAFFER (Economist): I left California, and I moved to Tennessee because Tennessee has no income tax.
SMITH: This is Arthur Laffer. His name may be familiar from something called the Laffer Curve. That's the idea that if you raise the taxes too high, people will stop working so hard, and the government may end up getting less tax revenue. So Laffer was living out his theories when he moved for tax reasons. And he says he's not the only one. If you look on average...
Mr. LAFFER: Those states with no income tax have grown a lot, lot faster than those with the highest income tax rates. So it's not just the rich who move, but the businesses move as well, and then the workers go with them.
SMITH: But social scientists say, wait a minute. Just because there are people moving out of New York and California and New Jersey, you can't automatically blame taxes. A lot of those low tax states have sunny weather, cheap land, relatively better economies. It's a very complex equation.
[POST-BROADCAST CORRECTION: New Jersey increased taxes on high earners in 2004, not 1994.]
What researchers needed was a natural experiment to tease out the influence of just the taxes. And they found such an experiment in Chris Christie's state of New Jersey. In 1994, New Jersey passed a new tax on people who make more than $500,000, an income tax bump of 2.6 percent. That turns into a pretty big hit for the wealthy. And what happens?
Professor CHARLES VARNER (Princeton University): You know, the vast, vast majority just don't respond to the tax. They stay put.
SMITH: Sociologist Charles Varner is with Princeton University. He says they found that some wealthy people did move. But here's the clever part of the study. He compared people who were just under the tax line - who made, say, $400,000 a year - with the people who suddenly had to pay more taxes. And the rich and the not-so-rich moved away from New Jersey at roughly the same rates.
Prof. VARNER: The effect on migration is minimal.
SMITH: Varner says there may be plenty of other arguments for avoiding new taxes on the rich. One can argue it's not fair. One can argue that it affects investments in new businesses. But a mass exodus? So far, no one's proved it.
Robert Smith, NPR News, New York. Transcript provided by NPR, Copyright NPR.
