Millionaires might complain about new tax, but they probably won’t flee, studies show
It’s a tough time to be making a million in Massachusetts.
Just ask Richard J. Valentine. Stung by a proposed state constitutional amendment that would raise taxes on top earners, the Hingham entrepreneur and investor said he might move to Florida rather than pay the new tax.
“You’ve built a business in the state and now, all of a sudden, they’re sticking it to you,” Valentine said. “It’s shortsighted because that millionaire could be the guy you’re working for and, when he goes, he takes 20, 30 jobs with him.”
The specter of wealthy residents fleeing if the state raises taxes on incomes over $1 million next year has emerged as a significant part of the opposition to the proposal. But studies from across the country show that while some wealthy residents will follow through on their complaints and actually move away, the vast majority will stay put, opting for family and familiarity over lower taxes in Palm Beach or Wolfeboro.
“It might be a little more of an incentive to pack up and move,” said Charles Steindel, former chief economist at the Department of the Treasury in New Jersey, which raised taxes on residents earning more than $500,000 in 2004. “But if that was the only reason people would be driven out, they would have all left for New Hampshire a long time ago.”
New Jersey estimated that 25,000 residents who would have paid $150 million in income taxes per year left the state in the seven years following its tax increase on high earners.
But those losses did not eclipse the total revenue gained from the tax hike, which was about $1 billion annually, according to a state report.
One nationwide study produced last year by Stanford researchers — considered the most comprehensive on the subject — showed that just over 2 percent of wealthy people who relocate appear to have been motivated by income tax changes.
The study tracked the tax returns filed by every million-dollar earner in the country from 1999 to 2011 to determine if they were moving in response to changes in tax policy.
“The most striking finding of this research is how little elites seem willing to move to exploit tax advantages across state lines in the United States,” the study found. “Millionaire tax flight is occurring, but only at the margins of statistical and socioeconomic significance.”
The study by two sociologists, Cristobal Young and Charles Varner, also zeroed in on the question of whether wealthy residents moved to the lower-tax side of state borders after one state raised its income tax rate. The findings indicated that tax increases in these border regions “did not lead to observable changes in the millionaire population” and that “the evidence that millionaires choose to live on the low-tax side of state borders is weak.”
Young and Varner found the highest earners actually migrate less than the general population because the wealthy are more likely to be married, own businesses, and have school-age children that tie them to a particular place.
Several other studies have also found that the number of wealthy residents who leave a state in response to higher taxes is usually small.
The proposed constitutional amendment in Massachusetts, headed for the 2018 ballot, would scrap the state’s flat income-tax rate of 5.1 percent and create a two-tiered system. Starting in 2019, earnings over $1 million would be taxed at a rate 4 percentage points higher. By comparison, New Jersey’s tax increase on the wealthy was less than 3 percentage points.
State officials say about 19,600 residents, or 0.5 percent of all filers in Massachusetts, would pay the higher tax. The measure would raise about $2 billion annually, which the state would have to spend on education and transportation.
Supporters argue that while some wealthy residents may leave, other entrepreneurs might move into the state to take advantage of a better-educated, more-mobile workforce.
“I think it would be a very good bet for the Commonwealth,” said Robert Tannenwald, a former vice president of the Federal Reserve Bank of Boston and former senior fellow at the left-leaning Center for Budget and Policy Priorities in Washington. “The benefits of the improved education and infrastructure have to be factored in, and the likely revenue losses from migration would be small — quite small — in comparison to the revenue gained for these vital functions.”
Tannenwald said he estimates that, for every dollar that states gain when they raise taxes on the rich, between 2 and 10 cents is lost from top earners moving to other states.
Joshua Boger, the founder of Vertex Pharmaceuticals, who lives in Boston, is among those wealthy residents who would stay and pay the higher tax.
“I don’t want to bash Florida, but you’d have to sentence me to jail to go there,” he said. “It’s not an attractive state for a lot of reasons.”
But critics point out that many wealthy individuals own at least a second home — and sometimes a third — so relocating is relatively easy. Florida and New Hampshire — each without an income or estate tax — are particularly alluring. And if the wealthy leave, they could take jobs and revenue with them and tarnish the business climate.
“It will put a chilling effect on any business already here, and any business considering coming here,” said Valentine, whose businesses include F1 Boston, an indoor go-kart track in Braintree.
Roger M. Marino, the co-founder of EMC Corp., said he may leave if his taxes go up, even though he has lived in Massachusetts his entire life.
“As far as I’m concerned, it’s a thing to consider — absolutely, seriously consider,” said Marino, who is 78 and has an estimated net worth of $1.2 billion. “I have a place down in Florida that looks mighty attractive now.”
No one doubts that some high earners leaving can have a serious effect on state revenues.
A study by the Center on Wealth and Philanthropy at Boston College found that, in the four years following New Jersey’s income tax increase, $70 billion in wealth left the state, while the expected amount of charitable giving fell by $1.1 billion.
“It doesn’t take too many of them to leave before it adds up,” said Eileen McAnneny, president of the Massachusetts Taxpayers Foundation, a business-backed think tank that opposes the higher tax rate in this state.
Seth Klarman, the billionaire chief executive of the Baupost Group, a Boston hedge fund, said he won’t leave if the tax increase is ratified but expects others will.
“I’m a Bostonian. I love this state and I’m not moving,” he said. “That said, I worry that this initiative may have the unintended consequence of causing tax revenue to leave the state. Of course, it would be no surprise if some investment capital and philanthropy left with it.”
Steindel, the New Jersey economist, said a more serious problem is the volatility that comes from basing more of the state budget on taxes paid by wealthy residents. Because the rich often pay more taxes on investments than on wages, the amount the state collects can fluctuate wildly with swings in the stock market.
“It wreaks havoc with your budget because you don’t know what the revenues are going to be,” Steindel said. “Quite literally, we would sit around in Trenton and wait for those checks to be opened. That’s a little nerve-racking when you’re sitting around in late April wanting to know if you’re going to have enough cash to keep the lights on.”