Do high state taxes drive away millionaires? Not really

Liberals and conservatives have been arguing for years over whether high taxes drive away those with high-incomes. Do millionaires flee from high-tax states to low-tax jurisdictions, as tax-cutting lawmakers claim? Now, in the most extensive look at the question to date, a group of researchers from Stanford University and the U.S. Treasury Department have the answer: Millionaires hardly ever move from one state to another for any reason, and when they do there is little evidence that their choice is driven by taxes.

There is one exception, Florida. For reasons the researchers cannot explain, rich people do move from high-tax states to the Sunshine State. But they also move from low-tax states to Florida. And few seem interested in decamping from high-tax states to other low-tax states, such as Texas, Tennessee, or New Hampshire. People just…want to live in Florida.

Excluding what the authors call the “Florida effect,” tax rates seem to have no effect at all on state-to-state migration by the rich. In their words: “The most striking finding of this research is how little elites seem willing to move to exploit tax advantages across state lines….Millionaire tax flight is occurring, but only at the margins of statistical and socioeconomic significance.”

This paper, by Christobal Young and Charles Varner of Stanford and Ithai Z. Lurie and Richard Prisinzano of Treasury, is important in part because relies on a very large sample of high-income taxpayers. The authors reviewed tax returns for all million-dollar earners in all 50 states and DC over 13 years. They looked only at income tax rates.

Millionaires Don't Move

Let’s start with their basic finding: Millionaires are extremely unlikely to move from one state to another for any reason. Of the roughly 500,000 households that report income of $1 million or more on their tax returns, only about 12,000, or 2.4 percent, move to a new state in any given year.  Very high earners, those who make $5 million or more, move at only a slightly higher rate—about 2.7 percent.  Those with low incomes are much more likely to move.

It isn’t surprising. The rich stay put because they have family and business obligations. Single people are much more likely to move than married couples, and high income households are much more likely to be married than others. Similarly, business owners are less likely to move than those who do not own business. And many high-income people own businesses.

About Florida

OK, but what about those millionaires who do move? The authors found that a 10 percent increase in the top tax rate lowers a state’s population of millionaires by about 1 percent.

What about those rich people who migrate to lower-tax states. The authors found little correlation between the lower tax rates and moving decisions. Except for Florida.

People do move to Florida from states with higher tax rates. Of course, most states with higher tax rates also have icy winters and less access to the Caribbean (they are also less likely to have a Zika epidemic, but that’s another story).

But even the Florida story is confounded by the data. True, millionaires migrate from high-tax New York to low-tax Florida. But rich people also move from low-tax Texas to low-tax Florida. Hard to know what that’s about, but it isn’t likely about taxes.

To test the tax-driven migration theory further, the authors also looked at counties that border states with high taxes and those with low taxes, say Oregon that has a progressive income tax and Washington that has no income tax at all. Do millionaires move across the Columbia River from high-tax Portland to low-tax Vancouver, WA? Nope.  The authors found no statistically meaningful behavioral response.

They even looked at counties where states on one side of the boundary raised tax rates by at least one percentage point. Once again, they found little tax-driven migration.

Overall the results of this broad study are clear: Yes, some millionaires may move to reduce their tax liability. But not many.      

This article first appeared at TaxVox.