The voices of Tax Policy Center's researchers and staff
In red states like Oklahoma, Kentucky, and West Virginia, teachers forced legislators to confront how low-tax policies have starved their education systems. In blue states such as New York, California, and Connecticut, legislators struggled with how to respond to the new federal tax law’s cap on the state and local tax (SALT) deduction. In an important new book on the impact of state tax policy, sociologist Cristobal Young’s “The Myth of Millionaire Tax Flight,” overturns conventional wisdom about the consequences of state tax policy. Lawmakers on the left and the right should take note.
Young argues that in their efforts to protect wealthy residents from the SALT deduction cap, blue states are responding to a largely irrational fear—that tax increases will drive the rich to move to lower-tax states. At the same time, by enacting regressive taxes and constraining their education budgets, low-tax red states are failing to respond to a much more real concern—that young people will decamp for states with better educational and employment opportunities.
There’s an unmistakable irony in the current political debates in state houses across the country: Democrats are working overtime to lower the federal tax liability of rich people. Why? In part, because the design of this Republican tax provision will “sock it to the blue states” by reducing the federal tax benefits available to high-income people in high tax (typically Democratic) states compared to those in low tax (i.e. Republican) states.
Lawmakers in blue states worry that high income residents might oppose relatively high progressive state taxes—and the services they fund-- now that they cannot deduct as much of those costs on their federal taxes. They even worry that millionaires could jump ship for a lower-tax state, and take their taxable income with them.
Not so fast. While everyone seems aware of a handful of high-profile millionaires decamping to low-tax states for tax reasons, in truth few move in response to state tax rates. Young examined tax data from every millionaire in the United States over thirteen years. He found that, even over that long time horizon, only 0.3% of all millionaires, on net, moved to a lower tax state. A larger share—about 2.5 percent-- move from one state to another each year, but most do not migrate for tax reasons.
As he told me by email, “Millionaires are not very mobile, and when they do move across state lines, taxes play a small role in the decision. Tax-induced migration among millionaires is not zero, but it is fairly close to zero.” Young notes that millionaires are, by and large, older people with a lifetime of close business, family, and friendship ties in their communities. In fact, much of the net migration to lower tax states is people moving to Florida, a state with many attractions beyond its tax system.
In other words, blue-state Democrats may have reasons to alter their tax systems to avoid the new SALT cap, but the threat of losing revenue to millionaire flight should not be one of them.
While blue states are changing tax policy in response to what is largely a myth, red states seem blind to the very real consequences of their tax and spending policies. There, years of tax cuts (often tilted toward higher-income households), along with balanced budget requirements, have created funding crises in their education systems. Red state budgets tend to be very regressive – giving benefits to the already well off at the expense of others, especially the poor. But as Young points out, “cutting funding for education to finance tax cuts for the wealthy is a classic intergenerational transfer from the young to the old.” As such, the policies ignore who really is mobile across state lines: young people, who are leaving red states in droves:
The most mobile people in the country are young college graduates – who have annual cross-state migration rates four times as high as millionaires (12 percent versus 2.5 percent).
Top-heavy tax cuts are often promoted as a pro-growth strategy for state economies. But if red states want to attract highly skilled workers, they need to invest in public goods – such as infrastructure, schools, and health care – that make a place appealing to young people looking to start families. “This can be paid for with modest taxes on the late career working rich,” Dr. Young concludes, because these residents “have already laid down roots and are not going anywhere.”
Legislators in both blue and red states can learn some important lessons from this valuable and readable new book.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
Tyler Evert/AP Photo