Editor’s Note: Also see the next post, comparing income taxes across all 50 states.
No joke: the wealthy disproportionately choose to live in states with income taxes.
The states with the highest concentrations of wealthy households all have income tax rates. (In fact, the rates are much higher than what Initiative 1098 proposes for Washington.) Wealthy households—defined here as owning more than $1 million in liquid investable assets, not including real estate—do not appear to be be fleeing states with income taxes. Just the opposite, in fact: they appear to be flocking.
To illustrate the point, here’s a look at tax rates in the states with the highest concentrations of wealthy households. I added in Washington under 1098 for comparison purposes.
I think there are a couple of ways you could parse this.
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First off, it’s clear that the New York City and Washington, DC metropolitan areas are major attractors of wealth. In fact, DC and Delaware rank 10th and 11th, respectively, while New York State ranks 12th in wealthy households per capita—and each of these states have relatively high income taxes. What’s interesting is that state income taxes don’t appear to be undermining the economic dynamism of NYC and DC, at least not as measured by the presence of wealthy households. In fact, you could be forgiven for thinking the reverse is true.
One explanation, maybe, is that while the wealthy may not enjoy paying taxes (who does?), they do like the return on the investment. After all, if you can choose where to live, it seems sensible to want to be in a place with good schools, healthy social conditions, well-functioning transportation systems, robust law enforcement, environmental regulation, and so on. So perhaps the rich treat paying for quality of life with an income tax as a good buy. (It’s certainly easy to imagine that’s the case with residents of Hawaii.)
Yet I suspect that’s not the full story. There are likely dozens of other factors at work, such as the ability of states to generate wealth, regional economic disparities, historical accidents, and more. During the next few weeks, I’ll dig into state income tax comparisons. We’ll see what comes to light.
Thoughts? Questions? Ideas?
Leave ’em in comments please!
Postscript 8/18/10: Here’s a more complete look at the effective income tax rates in these states:
Notes: States in the chart are rank ordered left to right according to the number of households per capita that own more than $1 million in liquid investable assets, not including real estate, as determined by Phoenix Marketing International’s analysis for 2009, here. The tax rates are calculated by Sightline based on data from the Tax Foundation, here. Rates do not include the very modest personal exemptions or standard deductions provided by some states, nor do they include state-authorized local income taxes in Maryland and New Jersey.
Back in April, the Economic Opportunity Institute put together a fact sheet on this very subject. We found that: * 3 of the states with the highest top marginal income tax rates (New Jersey, California, and Hawaii) have higher percentages of households with incomes above $200,000 and higher average incomes for the top 5% than any of the 7 states with no income tax. * Those 3 high-income-tax states also have both a higher percentage of well-to-do households and higher top incomes than the U.S. average. * 5 of the 7 states with no income tax have fewer households with incomes over $200,000 than the U.S. average. * The average income of the top 5% of households is lower than the U.S. average in all the states with no income tax. ~Aaron KeatingCommunications DirectorEconomic Opportunity Institute
I’ll give you Hawaii for quality of life. All the other states are bordering New York and Washington DC, which have even higher taxes, so I conclude that people live there because of work and choose not to live in the higher-taxes Washington DC or New York. If Washington State had the Federal Government or Wall St., we too would have a captive populace, but we don’t.
Eric de Place
Kirk,It’s an interesting point, and one I plan to explore more. Keep in mind, though, a couple of points:1. All of Washington’s West Coast and PNW neighbors have much higher state income tax rates than 1098 would levy. See: http://www.sightline.org/daily_score/archive/2010/08/12/comparing-tax-rates-under-1098. In fact, with the exception of the 9 other states that don’t have general income taxes, 1098’s tax rates would be lower than every other state in the nation.2. Even in the DC and NYC areas, things don’t break down like you might expect. For example, DC has a higher concentration of wealthy households than Delaware, which has a considerably lower tax rate, just as Maryland has more than Virginia where taxes are lower. But as I said, I plan to dig into this one more.
Interesting data. I wonder if there’s a way to tease out correlation vs causation. For example, do states like HI, MD, NJ, CT, & VA have high tax rates *because* they have higher incomes and chose to tax them over other tax bases (sales, business, property, etc).It would also be informative to see what happens when rates change. Have the heights of the bars changed disproportionately when states have changed marginal rates?
Is the level of income subject to income tax under 1098 indexed to inflation? Without that indexing, I suspect we will end up with the same perennial fight over fixing the state’s income tax as we do with the AMT at the Federal level.Maybe it’s just my conservative leanings, but I still don’t like the idea of voting for a tax on somebody else to lower my taxes – even if it does diversify the state’s revenue stream. I’m still open to the idea…
Eric, your analysis doesn’t include Oregon, which has the highest marginal income tax rates in the US. Research from ECONorthwest shows that in the Portland area we have a problem losing higher income individuals to Clark County (the agi of those moving from Portland to Clark County is significantly higher than those moving in the opposite direction and has been for the last 20 years, except for years like 2001 and 2008 when the stock market crashed).The issue of proximity is very important when doing these state by state analysis. If you are right next to a state with little or no income tax, the likely hood that you will see migration is greater, particularly if other quality of life aspects are similar. I posted about this on the Oregon Business Plan blog today http://www.oregonbusinessplan.org/Connect/Blog/PostID/15.aspx
Eric de Place
Velo–1098 is not indexed to inflation, so there is the potential for an AMT-like fight. As for the “tax on someone else” argument, I see where you’re coming from. On the other hand, I suppose one might argue that we’re already doing that in a sense: low income folks pay a vastly greater share of their income in taxes (via sales and excise taxes) than do the middle class and well-to-do in Washington.Jeremy–You’re right that I haven’t closely examined specific pairs or clusters of states. It seems somewhat plausible to me that Clark County’s zero income taxes would be appealing to high income earners in Pdx. If so, then 1098 might be good for Oregon perhaps. That said, I think there’s an interesting comparison to be made between Oregon and Texas. Texas has no income tax whatsoever while Oregon has the highest top marginal rate—yet both have the same number of wealthy per capita.
RE: Oregon / Clark County – If you are employed in Portland but live in Clark County, Washington, you pay Oregon income tax. It’s a pretty horrid arrangement and results in taxation without representation, but at least you can feel a little justified in buying whatever you can in Oregon to avoid Washington sales tax. (Even if that action is not strictly legal, BTW – You are required to declare and pay sales tax on goods that you bring into and use in the State of Washington) It’s possible that business owners could come up with some fancy, and probably perfectly legal, tax structure that keeps their personal residency in Washington but their business in Oregon. I can’t say for sure, but I would not discount the possibility. 1098 would create a disincentive for that kind of tax evasion I suppose.
Further on Oregon taxation: OR doesn’t have a sales tax. (Though some of us hope that may change someday.) So all its revenue is tied to income tax. Total taxation on individuals in WA vs. OR (sales + income tax) would be the meaningful comparison. OR suffers: as incomes fluctuate a bit more than consumption, leaves Oregon with a non-diversified revenue stream. So sure, live and work in WA and do your consuming in OR—best of both worlds. Isn’t paying less (or avoiding paying at all) for what we consume (state services as much as goods) the American way?
Interesting results, but a couple issues. (1) No evidence that wealthy “flock” to pay—the data doesn’t show that wealthy people move to these states, just that they live there. Correlation does not imply causation. Since most states have income taxes, it’s not surprising that most wealthy folks live in these states. (2) Wealth is not the same as income—of course Hawaii has many wealthy people, who may move there after they make the bulk of their income. No evidence that they’re “flocking” to pay the income tax.It’s an interesting discussion, just maybe a bit of a misleading headline. Agree that there are many factors at work. Probably, there are many reasons to live in any state—income tax is just one of many considerations. So all else equal, if Washington starts taxing its very wealthy at 10%, they’d be slightly less likely to live here (though most still would, due to other factors.) You could argue that they’re more likely to live here if you showed that the income tax would make life WAY better, which might be a tough case to prove. For example, there are many issues with education, but lack of funding may not primary problem..
Eric de Place
Iona,There is no 10% tax rate under 1098. Its top marginal rate is 9%—and that’s only paid on income earned in excess of $500k for singles or $1 million for couples. (So, as I’ve pointed out elsewhere, it’s mathematically impossible for any Washington resident to pay 9% of their income in state income tax under 1098.) The effective tax rate, of course, is exactly 0 for 99% of all Washington residents. And it’s probably 2 or 3 percent for most everybody else with just a handful of the super-wealthy paying more than that.
Eric–Totally agree. 9% not 10%, my mistake. And you’re right, it’s $0 for most people (unless it gets expanded), and something like 2-3% for most who do pay.However, still not sure that the data supports “flocking” to pay taxes. As you said, there are many reasons to live in any state. Probably, a few high-earners might leave the state and the rest will stay.
A CNBC Special Report on America’s top states for business considers a couple of factors that the Anti-1098 crowd loves to tout as a Washington benefit and others that aren’t. Washington ranks high in access to capital (WA #5, NJ #4) and technology & innovation (WA #5). The narrative for Access to Capital reads: “Companies go where the money is, and venture capital—an increasingly important source of funding—flows to some states more than others.” Sure enough, most of the money against I-1098 comes from venture capitalists and wealthy families such as the Nordstroms (and of course the Blethens through their generous editorial columns).However, except for Quality of Life (#8), WA is not in the top third at all for the other factors that make a business-friendly environment: Cost of Doing Business (33), Economy (18), Transportation (35), Workforce (30), Business Friendliness (34), Cost of Living (35), and Education (22). Overall, WA ranks 15th, Texas is #1, VA is #2, CO is #3, NC is #4, and MA is #4.Taking everything together, it appears that the anti-1098 crowd is staking its entire argument on keeping Washington’s high rank in access to capital and the fear that technology and innovation will suffer if rich people leave—a weak excuse if ever there was.