If You Tax Them, Will They Flee?
As Ezra Klein’s research desk explains, most studies show that rich people don’t flee higher-tax states for lower-tax ones and “the revenue generated by state tax increases on high earners overwhelms that lost from taxpayers’ leaving.” (Brad DeLong and Matthew Yglesias also discuss this issue here and here.) In fact, raising taxes on the highest-income households — a group that’s enjoyed the greatest rise in incomes and the greatest decline in taxes in recent decades — is a sensible and effective way for states to help offset the huge drop in revenues during the recession.
Tax rates just aren’t a big part of most people’s decisions about where to live — though that doesn’t stop some opponents of raising taxes on the wealthy from stringing together a few anecdotes in hopes that the rest of us will believe millionaires are in full flight from states that have called on them to pay their fair share.
When states increase income taxes on, say, people earning at least a million or half a million dollars a year, a few might leave. But most stay. And the state enjoys a significant gain in revenue to meet public needs, which are growing sharply in a devastating recession.
Perhaps the most definitive study, by Princeton University researchers, found that after New Jersey increased taxes on those making over $500,000, it experienced a yearly revenue loss of about $38 million because of those who left — but a gain of more than $1 billion from those who stayed.
Several states have created new brackets for upper-income households during the recession. My colleagues Liz McNichol and Andrew Nicholas and I found that if each of the 41 states with an income tax increased its rate by 1 percentage point on incomes above $500,000 (which would affect about 1 percent of taxpayers), they would raise a combined $8 billion.
Those funds would help states avert some of the most damaging cuts they are making in education, health care, public safety, and other areas due to the huge shortfalls they are facing. And that, in turn, would be good for wealthy residents as well as less-wealthy ones. After all, millionaires benefit from decent public services too.