Tax Flight Myth Busted

Monday, August 8, 2011 at 9:51 PM by

Policymakers commonly cite the fear of tax flight – the idea that rich taxpayers will pull up stakes and move to a state with lower taxes, taking their wealth with them – as a reason to keep taxes low on upper-income earners. A new report by the Center on Policy and Budget Priorities blows a hole in that theory.

It turns out that taxes are far down the list of why people move. Access to jobs, cheaper housing, and a better climate are the main reasons why people move – and even those reasons aren’t very common. Just 1.7 percent of people moved across state lines between 2001 and 2010, and about 70 percent of those born in the U.S. live in the same state for their whole life.

A tale of two states, New Jersey and Florida, demonstrates the folly of the tax migration myth. In New Jersey, a tax increase on filers with income over $500,000 went into effect a few years ago. In the subsequent years, filers earning more than $500,000 tended to leave the state – but so did earners earning between $250,000 and $500,000, at about the same rate. A study estimates that at most 70 tax filers earning more than $500,000 left the state because of tax-related reasons, costing the state $16.4 million over three years – or 0.4 percent of the $3.8 billion in the revenue gain from the tax increase.

The situation in Florida also demonstrates the disconnect between migration and taxes. Until recently, people flocked to Florida. But in the late 2000s, that movement reversed direction as Florida experienced a net out-migration. No significant tax changes contributed to this change in fortune; instead, housing prices rose steeply during this period, making it a less tempting destination for people wishing to super-size their square footage.

And let’s not forget that taxes cut both ways in influencing decisions about where to live. Taxes underwrite public services that attract jobs and investments, and promote a high quality of life – a quality of life that is jeopardized by the cuts in Wisconsin’s budget. Policymakers should leave behind the myth of tax flight, and instead make decisions on tax policy based on what’s best for our communities and our local economies.

Tamarine Cornelius

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