For years we’ve heard politicians argue that if we raise taxes on millionaires, business owners and job creators leave for South Carolina or Florida. But ten years ago New Jersey and California tried the opposite approach, and somehow didn’t see their job creators packing their bags for Miami Beach.
In 2004 New Jersey created a special “millionaires tax” bracket for incomes above $500,000, and raised the marginal tax rate on that bracket to 8.97 percent. It was the highest state increase in top marginal rates of its time, and one of the most progressive state tax policies in the country. Then in 2005, California raised its marginal tax rate on incomes over $1 million to 10.9 percent.
In 2012, Stanford’s Cristobal Young and Princeton’s Charles Varner analyzed migration rates of New Jersey and California millionaires before and after the new tax rate, and compared them with households in the next tax bracket down. In New Jersey they also broke down millionaires into sub-groups, including retirees and business-owners.[i] In California, they divided millionaires by income brackets.[ii] Finally, the authors also analyzed millionaire migration rates after California’s 1996 tax cut.
If the new tax did force millionaires to leave for a lower tax state, we would expect much higher departure rates for millionaires than for wealthy households who weren’t exposed to the new tax, and higher departure rates still for households earning $10 million rather than $1 million. Similarly, we would see higher in-migration after 1996 if California’s tax cuts made it more attractive to millionaires.
“In the popular press, these taxes have been often criticized as expulsive agents, certain to provoke tax flight.” – Young and Varner
Instead, the authors found that the new tax had no significant effect on millionaires overall, and especially not on business-owning millionaires. In fact, millionaire retirees in New Jersey were the only group who were markedly sensitive to the tax. Young and Varner also found that out-migration among the very wealthy – those making $4 million a year or more – actually declined after the tax. “Individuals at the very top seem to be more strongly attached to their current state,” the authors remarked. They also found that migration did not change in response to California’s 1996 tax cut. Millionaire migration actually seems to be an effect, not a cause – job creators moved to California when they saw increased business activity, not lower taxes.
“Migration ‘non-response’ to modest changes in tax policy is also relevant for policymakers considering tax cuts. Just as new top tax brackets do not drive millionaires to flee California or New Jersey, we do not expect tax cuts to influence top-income earners’ state of residency.” – Young and Varner
The evidence here shows that the notion that tax cuts for the rich will attract job creators is nothing more than a political talking point.
[i] Young, Cristobal and Varner, Charles. (2011). Millionaire Migration and State Taxation of Top Incomes: Evidence from a Natural Experiment. National Tax Journal, 64 (2, Part 1), 255-284.
t. National Tax Journal, 64 (2, Part 1), 255-284.
[ii] Young, Cristobal and Varner, Charles. (2012). Millionaire Migration in California: The impact of Top Tax Rates. Stanford University Working Paper Series.