In 2008, Maryland added four new income tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. , including a top rate of 6.25% on income over $1 million. (This is in addition to county income taxes, which average 2.98%.)
As we and others have noted before, the Comptroller of Maryland has reported that the number of “millionaire” returns tumbled sharply between 2007 and 2008, a 30% drop in filers and 22% drop in declared income. Rather than income taxes from this group rising by $106 million, they fell by $257 million.
The recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. is certainly a contributor: everyone is earning less. But the Comptroller did an interesting additional analysis: how many people filed as millionaires before the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increase, then did not file at all the following year? The Wall Street Journal explains the findings:
One-in-eight millionaires who filed a Maryland tax return in 2007 filed no return in 2008. Some died, but the others presumably changed their state of residence. (Hint to the class warfare crowd: A lot of rich people have two homes.)
A Bank of America Merrill Lynch analysis of federal tax return data on people who migrated from one state to another found that Maryland lost $1 billion of its net tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. in 2008 by residents moving to other states. That’s income that’s now being taxed and is financing services in Virginia, South Carolina and elsewhere.
States like Florida and Texas have no personal income tax, so the savings for a rich person who stops paying taxes in Baltimore or Montgomery County can be in the hundreds of thousands of dollars each year. Montgomery County, outside of Washington, D.C., is Maryland’s wealthiest and was especially clobbered, losing nearly $4 billion in taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. in 2008, with some 80% of those lost dollars from high-income returns.
Thanks in part to its soak-the-rich theology, Maryland still has a $2 billion deficit and Montgomery County is $760 million in the red. Governor Martin O’Malley’s office tells us he wants the higher rates to expire “as scheduled at the end of 2010.” But there are bills in both chambers of the legislature to extend the surcharge. The state’s best hope is that politicians in other states are as self-destructive as those in Annapolis.
We’ve always emphasized that millionaires’ taxes do long-term damage to a state’s economy, but here is significant evidence that the damage may be nearer-term than at least I earlier thought.
More on “millionaires taxes” here.
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