Maryland Wonders: Where’d the Millionaires Go?

May 18, 2009

As we detailed in our most recent report on so-called millionaires’ taxes, we now have five states that have imposed a top rate near or above 10% on a small subset of high-income earners. While original adopters California in 2005 imposed their 10.3% (now 10.55%) tax rate at income over $1 million, subsequent states have crept lower in the income scale. New Jersey and New York now imposes a 8.97% tax on income over $500,000, Maryland’s 5% state rate (plus an average 2.98% county income tax) kicks in at $150,000, and now Hawaii has an 11% tax rate on income over $200,000.

Supporters of these taxes say that those still able to earn high incomes in this time of recession should kick in a bit more to help state budget shortfalls. Critics respond that such disproportionate tax rates undermine long-term economic growth by discouraging high-income earners from staying in or relocating to the state. The evidence on both sides has primarily been anecdotal, focusing on California and New Jersey, which have had the taxes the longest.

Now anecdotal evidence is coming in from Maryland, which imposed its new tax brackets in 2008. On May 13, Maryland Comptroller Peter Franchot (D) wrote in a letter that the number of tax returns reporting income over $1 million has dropped by a third. More to the point, revenue from those earners has dropped by $100 million. Tax Analysts‘s Karen Setze interviewed some government officials:

“Taxes don’t just redistribute wealth, they redistribute people,” House Minority Whip Christopher Shank (R) said [in 2008]…. More recently, House Minority Leader Anthony O’Donnell (R) told Tax Analysts that “I have been told by many people that because of the tax increase, they are moving their business or their home of residence out of the state. They said they either had moved or were doing it. A lot of these folks have residential holdings in other states, so it’s easy.”

In the news this week was Paychex founder Tom Golisano, who announced that he is moving to Florida specifically to escape a likely income tax increase in his home state of New York.

No doubt the recession is a cause of the drop in million-dollar tax returns: people of all incomes have seen drops in earnings and net worth. Looking at the incomes of high-earners, one sees that they soar high in booms but drop sharply in busts—a much more volatile pattern than other revenue sources like sales or gasoline taxes.

That makes these millionaires’ taxes all the more senseless as a solution for a recessionary budget crisis: at best they hit up one set of people (when we’re all hurting and we all benefit from government), and a declining revenue source to boot. In the short term the revenue may help the state balance its budget, but in the long-term it has made itself a less attractive location to the high-income earners, job creators, and innovators of the future.

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