Wednesday, February 9, 2011

Rich not fleeing high-tax states

Yves Smith posts on a study about whether people relocate based on income tax increases:
A solid paper by Cristobal Young and Charles Varner, “Millionaire Migration and State Taxation of Top Incomes” (hat tip Matt) helps debunk the idea that high income individuals will pull up stakes if their taxes go up. The case study is an interesting one: New Jersey’s tax increases on top earners. New Jersey made the biggest increase of all US states, and also has the distinction of having a low income tax state (Connecticut) nearby, meaning that tax-sensitive residents had an option of moving not all that far to escape the increase, which presumably would allow them to maintain family ties...
The study results might be labeled “Millionaires are People Too.” Economists and lobbyists love to stress often base their arguments upon economic rationality and contend that everyone is out to maximize his personal bottom line. But moving is a hassle and costly, and most people’s social lives are grounded in their community and their workplace. Relocating is likely to result in a longer commute for those still employed, would cause disruption to any children still in school and would weaken many existing social relationships. The study also provides a survey of the literature, noting findings in Switzerland, for instance, of communities in neighboring cantons with even wider taxation differences and little evidence of tax-driven migration.
This is a very sore spot with me.  It is accepted as economic fact that people flee Ohio because of the income tax.  Since we don't have oil royalties like Texas, Ohio politicians (mainly Republican) claim Ohio will grow significantly if we defund our schools and local governments, slash Medicaid and get rid of the income tax.  Often, they say that is why old people flee to Florida.  I'll go with the fact that it is currently 10 degrees outside.  They generally say Indiana is some sort of low-tax paradise, albeit one without a lot of paved roads.  When I was in Minnesota this summer, people claimed South Dakota was the destination of frustrated Minnesotans in the newspaper letters-to-the-editor.  My favorite claim is that businesses less than 5 years old create most new jobs, and Ohio must lower tax rates to attract those entrepreneurs.  I'll go out on a limb and guess that most start-up businessmen begin where they are living, because they need the developed support system of their existing community when taking such a large risk.  I know I would want to stay close to the people I know in such a situation, and not shop around to relocate for a small tax arbitrage advantage.

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