Did People Flee New Jersey After 2004 Income Tax Hike?

April 14, 2009

As New Jersey looks to fill another budget hole (by the way, the sun came up today too), there is currently much debate along political lines over whether or not New Jersey's recent income tax hike in 2004 led to high-income people fleeing the state.

Did at least one person move because of it? Almost assuredly yes. Did everyone move? Of course not. The answer lies somewhere in between. But while it may be difficult to measure the extent to which the tax hike led people to move because one must hold all other factors constant (like the fact that people have been moving south and west in the United States generally for the past couple decades or so), we can all agree that it is merely an empirical question that should not depend upon one's political bents. But as is too often the case in tax policy, empirical interpretation is guided by one's initial bent on tax policies as opposed to the other way around.

While the following calculations aren't a definitive answer to the question of how much did the New Jersey tax hike in 2004 matter given that we aren't holding all other factors constant, they should give us some indication of how much it mattered. Using the best available IRS income data by state for those tax returns earing over $200,000 (see below), I perform a quick and crude back-of-the-envelope "dynamic" calculation of the effect on income earned by those making over $200,000 from the tax hike.

From 2003 to 2004, the number of returns earning over $200,000 in the U.S. grew by over 17 percent, while in New Jersey, they grew by 13.3 percent. If you assume that this entire difference was due to the tax increase, we can estimate that there would have been 168,124 returns with AGI over $200,000 filed in New Jersey in 2004 had there been no tax increase. And further assuming that New Jersey's per capita income amount in the 200k+ range grew slower because of this (essentially assuming that very, very high income people were more likely to leave), I estimate that income earned over $200,000 in New Jersey would have been $54.78 billion in 2004 instead of the actual estimate of $50.49 billion in 2004. This implies a tax-induced 8 percent reduction in income earned above $200,000 under what I would consider fairly generious assumptions in favor of high mobility.

Assuming that about 79 percent of all the income earned by those tax returns above $200,000 is earned by those above $500,000 (reasonable based upon IRS data for NJ for 2001) and assuming that the entire reduction in income was concentrated for those above $500,000 (who were hit significantly by the tax increase), the aggregate reduction in income earned above $500,000 in AGI in New Jersey as a result of the tax increase would be approximately 10 percent. Therefore, based upon my very crude estimation procedure, given that the percent increase in the tax rate was nearly 41 percent, I think it's safe to say that New Jersey's income tax hike in 2004 increased revenue despite any dynamic response effect.

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