State Tax Increases On The Wealthy Won’t Make Them Move

As states grapple with the ongoing revenue crisis caused by the pandemic recession, waiting (perhaps in vain) for help from Washington, some are considering tax increases.  Good.  Targeted tax increases on the wealthy, even in a recession, can help maintain essential state services while not hurting the economy.  And there’s not much evidence that higher taxes make the wealthy move away.

New Jersey has just fired the latest shot, agreeing to raise the marginal state tax rate for incomes over $1 million from 8.97% to 10.75%.  (The higher rate already was in place for incomes over $5 million.)

As with any tax increase, we hear a familiar chorus claiming marginal tax increases will drive the wealthy away and hurt the economy.   Republican Joe Bramnick, the NJ Assembly’s Minority Leader, said the tax “will make outmigration worse and shift the tax burden onto the middle-class when others leave.”      

But there’s little evidence to support this type of claim.  A 2014 Stanford University study of state-level “millionaire taxes”, including a 2005 New Jersey increase, found “little migration as a result of millionaire taxes.”  They report this for eight states that have enacted such taxes.

In fact, over 90 New Jersey economists and experts signed an August open letter calling for targeted tax increases to offset damage to the budget and essential services. They called on the state “to raise revenue rather than cut the social and physical infrastructure that will be necessary to protect the health and economic well-being” of the state.

For the secret to getting rich isn’t low tax rates.  It’s having strong infrastructure, an educated and diverse work force, research and development, and affluent consumers.  California’s Silicon Valley isn’t producing millionaires—and billionaires- because of low tax rates.  It’s because government made long-term investments that laid the groundwork for the tech industry, creating positive feedback loops of innovation, attraction and creation of educated talent, and capital investment.

The Stanford study found that “in New Jersey in 2005, the out-migration of millionaires increased by 37 individuals—a loss that could be attributed to the new tax. In the same year, however, the millionaire population increased by over 3,000 individuals.”  They report similar results for other states.  Strong economies, educational infrastructure, and human capital make millionaires.

Washington’s failure to provide essential aid to state budgets has others considering tax increases.  In New York, there are calls for a tax on billionaires and also a financial transactions tax, a small surcharge on trillions of transactions.

New York Governor Andrew Cuomo has resisted this so far, although the state already has a transactions tax on the books, which generates billions of tax dollars every year.  But the tax is rebated 100% to financial firms, so the state could simply recapture some of the revenue by trimming the rebate.  (None other than billionaire Michael Bloomberg called for a federal financial transactions tax during his short-lived Presidential campaign.)

California’s budget has been hamstrung for decades by Proposition 13, which amended the state’s constitution, capping property taxes and limiting increases for both residential and commercial property. Although it makes more economic sense to simply do away with this restriction altogether, home owners are a powerful voting bloc.  So the state supports a new ballot initiative, Proposition 15, that would tax commercial property at market rates, creating a “split roll” where commercial and residential property is taxed differently.

But states and cities should choose tax increases carefully.  Some are considering increases in sales or gas taxes, but consumption taxes are regressive and fall disproportionately on those who can least afford them.  New Jersey wisely is coupling its millionaire tax with cash rebates to households with incomes below $150,000, which is smart economically and politically.

State and local tax increases are no substitute for necessary federal aid.  But current political battling over any pandemic aid (much less state and local fiscal relief) makes that less likely each day.

So New Jersey’s well-designed millionaire’s tax, coupled with rebates to poor and middle-income households, shows states and cities a way forward if they must raise taxes rather than cut essential services.  After all, those essential services—education, research and development, public health, police and fire—help create millionaires and billionaires. They can afford to give a little bit back.