Taxing the highest-income earners is a strategy some states employ to raise funds for education, infrastructure and other programs. This year, several states are considering raising taxes on their wealthiest residents.
If enough signatures are gathered by August, voters in Colorado will be asked to approve a measure that would add a half-percent tax on incomes of more than $405,000 to the current 4.63 percent flat tax.
Los Angeles County in California recently requested a change to state law that would allow it to levy a local income tax to pay for services for the homeless.
Minnesota’s legislature is considering a ballot measure to fund long-term care for senior citizens and the disabled by extending Social Security taxes to higher wages.
Maine voters will consider a 3-percent surcharge on income exceeding $200,000 per year, with proceeds earmarked for public schools.
Massachusetts voters may see a tax increase question on a 2018 ballot measure that would expand the current 5.1 percent flat tax by 4 percentage points on income exceeding $1 million.
These type of movements to increase taxes on the affluent have given rise to speculation that wealthy citizens migrate away from high income tax states and choose to live in states where income tax rates are lower or that don’t collect individual income tax at all. Seven U.S. states have no income tax, including Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming.
Stephen Ziobrowski, a partner at law firm Day Pitney in Boston, who specializes in tax planning for businesses and individuals, said the Massachusetts measure could have significant micro and macro impacts.
“You always have a concern with something like this that it will cause wealthy people to pick up and leave,” Ziobrowski said. “We saw this happen when Florida got rid of its estate tax and we had a lot of people moving out of Massachusetts and changing their domiciles as a result. If you start to impose a tax on the incomes of wealthy people in ways that other states are not doing, you are risking a brain drain, for lack of a better term.”
On the macro level, he said, some wealthy taxpayers may even consider leaving the United States if such law is passed, especially if they think tax policy is being directed against them.
“My concern is they see something like this as a beginning of a trend and they begin to get antsy,” Ziobrowski said. “The Massachusetts legislature should be sure their legal counsel takes a hard look at what they are proposing and assures them it complies with the Massachusetts Constitution. There is a history here. Back in 2005, the Massachusetts Supreme Judicial Court ruled that an act passed by the legislature which had affected the taxation of capital gains in 2002 was unconstitutional. As a result, the Department of Revenue was required to refund hundreds of millions of dollars of taxes it had collected. The legislature would not want to repeat that experience.”
A recent study by the American Sociological Association, however, questions whether wealthy citizens migrate to low income tax states in significant numbers.
“The most striking finding in our study is how little elites seem willing to move to exploit tax advantages across state lines,” said Cristobal Young, an assistant professor of sociology at Stanford University and the lead author of the study. “Millionaire tax flight is occurring, but only at the margins of significance.”
While wealth is often associated with the freedom and ability to live anywhere, the study found that affluent people are often tied to their location by job responsibilities and the needs of their families.
According to the study, about half a million individuals file tax returns reporting an income of more than $1 million each year. Of these, only about 12,000 millionaires relocate to a different state each year, translating into a millionaire migration rate of just 2.4 percent. This rate is actually lower than the migration rate of the general population, according to the study. The highest rate of migration occurs among low-income tax filers: 4.5 percent among people who earn around $10,000 per year.
While the incidence of millionaires fleeing high-income tax states is smaller than might be expected, it is true that when they do migrate, they tend to go to states with a lower tax rate, particularly Florida, said Young.
Which states’ millionaires might be thinking about making a move to a friendlier tax environment, such as Florida? The following states have the highest marginal individual income tax rates this year, according to the Tax Foundation, a Washington D.C.-based independent tax policy research organization.
If the highest wage earners are fleeing high interest rates, the following 10 states might soon be saying goodbye to their wealthiest citizens:
Wisconsin’s capitol building in Madison. (Photo: iStock)
Income tax rate: 7.65 percent.
Number of households: 2,323,821.
Millionaire households: 111,358.
Kayaks on Waikiki Beach, Hawaii. (Photo: iStock)
Income tax rate: 8.25 percent.
Number of households: 473,750.
Millionaire households: 32, 829.
8. Washington, D.C.
Income tax rate: 8.95 percent.
Number of households: 292,398.
Millionaire households: 18,267.
Montpelier, Vermont. (Photo: iStock)
Income tax rate: 8.95 percent.
Number of households: 259,036.
Millionaire households: 15,168.