Do state taxes drive away the rich?
Editor's Note: Also see the next post, comparing income taxes across all 50 states.
No joke: the wealthy disproportionately choose to live in states with income taxes.
The states with the highest concentrations of wealthy households all have income tax rates. (In fact, the rates are much higher than what Initiative 1098 proposes for Washington.) Wealthy households -- defined here as owning more than $1 million in liquid investable assets, not including real estate -- do not appear to be be fleeing states with income taxes. Just the opposite, in fact: they appear to be flocking.
To illustrate the point, here's a look at tax rates in the states with the highest concentrations of wealthy households. I added in Washington under 1098 for comparison purposes.
1098 wealth
First off, it's clear that the New York City and Washington, DC metropolitan areas are major attractors of wealth. In fact, DC and Delaware rank 10th and 11th, respectively, while New York State ranks 12th in wealthy households per capita -- and each of these states have relatively high income taxes. What's interesting is that state income taxes don't appear to be undermining the economic dynamism of NYC and DC, at least not as measured by the presence of wealthy households. In fact, you could be forgiven for thinking the reverse is true.
One explanation, maybe, is that while the wealthy may not enjoy paying taxes (who does?), they do like the return on the investment. After all, if you can choose where to live, it seems sensible to want to be in a place with good schools, healthy social conditions, well-functioning transportation systems, robust law enforcement, environmental regulation, and so on. So perhaps the rich treat paying for quality of life with an income tax as a good buy. (It's certainly easy to imagine that's the case with residents of Hawaii.)
Yet I suspect that's not the full story. There are likely dozens of other factors at work, such as the ability of states to generate wealth, regional economic disparities, historical accidents, and more. During the next few weeks, I'll dig into state income tax comparisons. We'll see what comes to light.
Thoughts? Questions? Ideas?
Leave 'em in comments please!
Postscript 8/18/10: Here's a more complete look at the effective income tax rates in these states: (See full size version here.)
Notes: States in the chart are rank ordered left to right according to the number of households per capita that own more than $1 million in liquid investable assets, not including real estate, as determined by Phoenix Marketing International's analysis for 2009, here. The tax rates are calculated by Sightline based on data from the Tax Foundation, here. Rates do not include the very modest personal exemptions or standard deductions provided by some states, nor do they include state-authorized local income taxes in Maryland and New Jersey.
A *little* misleading. These are simply the areas--the culture centers--with the most millionaires per capita, period. But it does tend to let the air out of the tires on the canard that millionaires will actively flee states that impose an income tax.
ReplyDeleteWYOMING, SOUTH DAKOTA, I will endure your bleak, denuded, bitter, unpopulated prairies to help shield my wealth from civic responsibility!!!
You know, unless you're Scrooge McDuck and counting the coins in your money sacks is your bestest, most fun occupation, most people like to actually, y'know, spend money in places that are nice places to live.
The Census Bureau has interesting statistics about interstate migration. (www.census.gov/prod/2003pubs/censr-8.pdf) (and a prettier version of the same data: pewsocialtrends.org/maps/migration).
ReplyDeleteWhile it doesn't include data on the wealth of the people who are migrating, it does make it pretty clear that if income taxes are a cause of people relocating, it is just one of many causes and one of negligible impact.
South Dakota's largest inflow was from Minnesota, but its largest outflow was also to Minnesota, and the outflow to its income-taxing neighbor was larger than the supposedly income-tax-free seeking inflow.
Our own state is the target of the highest inflow from our income-taxing neighbors of Oregon and Idaho, but our outflow to California (and to income taxes) was almost as big as Oregon and Idaho's inflow to WA put together.
The supposed trend of migration out of income-taxing states into non-taxing states just isn't there.
And finally, I'd like to be Captain Obvious for a second and point out that if one was rich enough to move out purely because of income taxes, they probably would have already done so and gone to the Caribbean. Then one technically isn't obligated to pay the federal income tax, much less a state income tax. If your going to do it, go all the way: state income taxes are a fraction of the federal one that is the same no matter what state one is in.