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'Millionaire Migration' — A Myth?

Anti-tax advocates argue that millionaires will flee from states that raise taxes on their highest earners.

Embroiled in the California debate over Proposition 30's progressive income tax proposals, some politicians argued pre-election that raising taxes on the highest earners will drive them to states with lower tax rates, taking businesses and jobs with them.

But a study released by the Stanford Center on Poverty and Inequality concludes that "millionaire migration" is simply a myth.

Stanford's Cristobal Young, an assistant professor of sociology, and Princeton's Charles Varner, a doctoral candidate in sociology, conducted the study at the request of the California Board of Equalization, allowing them unique access to California Franchise Tax Board income data.

The mountain of data included information from all state income tax records for California from 1992 to 2009. The result of all that data crunching? The migration of millionaires in and out of the state has almost no relationship to tax increases or tax cuts.

Young said that having access to such comprehensive data allowed him and Varner to contribute compelling evidence to the income tax debate.

"I think it's important that we can bring really high quality data to these kinds of issues," Young said.

The immense dataset, though a goldmine, also represented a challenge for the researchers, who pored over more than 300 million data points.

"It was an entirely different technical world," said Young. "You have to be extremely careful with this kind of data. Everything gets triple-checked and code-reviewed."

The findings are consistent with the results of a study the team led in New Jersey last year.

The reason the number of California millionaires varies from year to year has almost nothing to do with taxes, the researchers found. Instead, the numbers change as incomes fluctuate, most likely because investments are sensitive to market cycles.

Varner and Young looked at millionaire migration after California's 2005 Mental Health Services Tax was enacted, as well as after state tax cuts in 1996.

They found that millionaires did not flee as a result of the tax increase (in fact, more millionaires moved into the state than out during that period), nor did millionaires from elsewhere move to California as a result of the tax cuts.

Evidence of tax flight 'hard to find'

What could account for the fluctuations in California's millionaire population?

According to the study, it's not due to tax changes or rich people leaving the state. Almost all of the fluctuation comes from income dynamics at the top, with taxpayers falling into and out of the millionaire income bracket as their income rises and falls across the million-dollar mark from year to year.

The temporary nature of such high earnings may help explain why the additional taxes in the study didn't cause a noticeable flight of millionaires.

Personal connections seem to weigh more heavily than tax rates in deciding where to take up residence.

"People are tied to states for different reasons," Young said. "They don't want to take their kids out of school, they want to stay connected with friends, with families … with business contacts."

People crowd together, from Silicon Valley to New York City, because of the returns associated with collaboration, he said.

The study's findings seem to dispel the "market metaphor," in which states advertise their low tax rates in a competition to woo high-income individuals.

"This is a poor representation of how people decide where to live," Young said.

Young added that looking at the tax flight issue only scratches the surface of state financial woes.

"People need to think about the depth of California's budget problems," he said. "I think there's much, much bigger things to worry about than this issue of tax flight, because it's really hard to find any evidence of it."

The researchers hope to perform similar analyses in Maryland, Oregon and Washington – eventually comparing trends across states.

"I hope people hear, listen to and absorb what the evidence says on this issue," Young said.

Melissa Pandika, author of this post, is an intern at the Stanford News Service.

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Jo Tog November 08, 2012 at 07:53 PM
You still don't get it Marc Norton. But then I don't expect you to. It's ok. Have fun being a slave to a communist one party state.
Ephraim Gadsby November 08, 2012 at 08:52 PM
I followed the link and read the study. Here's the abstract: This paper examines the migration response to a millionaire tax in New Jersey, which raised its income tax rate on top earners by 2.6 percentage points to 8.97 percent, one of the highest tax rates in the country. Drawing on unique state tax micro-data, we estimate the migration response of millionaires to the rate increase, using a difference-in-differences estimation strategy. The results indicate little responsiveness, with semi-elasticities generally below 0.1. Tax-induced migration is estimated to be higher among people of retirement age, people living on investment income rather than wages, and people who work (and pay tax) entirely in-state. The tax is estimated to raise $1 billion per year and modestly reduce income inequality. Contrary to what the people at Pacifica might think, California and New Jersey are different states.
Kevin November 15, 2012 at 03:41 PM
When you are going to pay close to 56% of the next dollar you earn to the Feds and CA it really gets your attention. The retroactive nature of the increase (applies to all earnings in 2012) is crazy in my opinion. Since the FB offering flopped, J. brown had to do something to increase his take.
JTB November 15, 2012 at 04:12 PM
Some of you people, e.g., Marc Norton, just don't get it. We need to give people an excuse to want to live and work and spend their money and create jobs in California, not to pack it up and go elsewhere with their money. Please stop reading leftist propaganda pieces and take an elementary economics course. Heck, Uncle Jerry/Barack might even pay for it.
Marc Norton November 15, 2012 at 04:20 PM
Marc Norton gets it just fine, thank you. Pay attention to the facts, not to propaganda, leftist or otherwise. The article above is about a factual study that finds that rich people aren't fleeing California, whether you want to believe it or not. They aren't as ignorant or foolish as some of their sycophants.

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