Myth Busting: The Millionaire Tax Flight

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As the COVID-19 crisis rages on, almost every state is now facing a choice between cutting public services or finding new sources of revenue to meet their sudden budget shortfalls. Most states have responded by enacting severe, harmful austerity measures, like cutting funding for healthcare, education, and other social services that millions of people rely on. But last week, New Jersey became one of the first states in the nation to take a different route.

On Thursday, Governor Phil Murphy announced that New Jersey would avoid harmful austerity by enacting a “Millionaires’ Tax” exclusively on its richest residents. On its face, this doesn’t seem like such a huge accomplishment – Governor Murphy was, after all, elected on a campaign promise to enact a Millionaires Tax – but it took nearly three years and a devastating pandemic to get it done, despite the fact that all three branches of the state government are controlled by Democrats. 

So why did it take so long? The answer is because of the “myth of the millionaire tax flight,” an anti-tax argument that you’ve probably heard before. 

When state governments consider raising taxes on rich people, rich people in those states like to claim that if their taxes are raised too much, they’ll just pack up and leave for another state with lower taxes. If this were true, states raising taxes on rich people would end up losing tax revenue at the end of the day, making it seem like keeping tax rates on the rich low is the best option. But it’s not true, even if it’s so widespread as to seem like common knowledge. It’s so pervasive that it has stopped even the most vocally progressive Democratic leaders from taxing the rich in any substantive way. So we need to dispel the myth once and for all.

Despite a couple of high-profile cases of cowardly millionaires fleeing their homes for states with no income taxes, the overwhelming majority of millionaires don’t leave when their tax bills go up. It turns out that all those rich people threatening to leave are almost crying wolf. For years, study after studyhas shown that millionaires don’t leave in significant enough numbers to affect state revenue when their rates change. 

This makes sense if you think about it. If you’re a rich person, a slight increase in your tax rate doesn’t actually affect your day-to-day life or standard of living all that much. Most rich people can afford to pay more without much trouble, especially considering that many already avoid paying their fair share in both federal and state taxes thanks to a dizzying array of loopholes, tax breaks, and special privileges that help many of them pay a lower tax rate than working class folks. Tacking a couple extra percentage points onto a state income tax isn’t even going to make a dent in their overall wealth, and they’ll likely still be paying disproportionately less than ordinary Americans. 

If anything, rich people are less likely to move for financial reasons. While rich people might like to live in a low-tax state, they’re not going to uproot their lives to avoid paying slightly higher taxes. Their homes are there, their businesses and professional connections are there, their families are there, and their friends are there. That’s a lot to give up for a negligible financial loss.

What’s more, even when greedy 1 percenters do leave, other wealthy residents quickly take their place. That replacement rate negates any revenue hit altogether. States like New York and California, known for their generally higher-than-average tax rates, still continue to attract far more high-net-worth folks than states like Alaska and Florida that have no income tax whatsoever, because even millionaires choose their homes based on more than just a silly tax rate. 

There is, however, one type of income migration we should all be concerned about – and it happens when states don’t tax the rich. Cities like San Francisco and New York have seen the number of rich residents skyrocket in recent years, and costs of living have risen in kind. Those rising rates have kicked out longtime lower-income residents as cities and states refuse to tax the rich and invest in the public services and affordable housing that could maintain the balance. That imbalance stresses the labor market, entrenches inequality to insurmountable levels, increases homelessness, and leads to fewer opportunities for everyone. 

Unless more states follow New Jersey’s lead in calling the bluff of tax-averse millionaires, we could be looking at a disastrous next year in which millions of state and local government employees lose their jobs and millions more lose access to services they rely on, all while a small number of people get richer and richer. But we can avoid that future if our leaders simply grew a backbone, ignored the millionaire flight myth, and taxed the rich.

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