Tuesday, May 19, 2009

The flight of fortune

Two articles in recent days add up to a warning to legislators in Madison who hope to tax their way out of the current budgetary mess. "Tax the rich" may sound good to the envious soul, but it hardly makes for good public policy when wealth leaves Wisconsin behind.

Arthur Laffer and Stephen Moore, in an article for the Wall Street Journal, describe what happens when states decide to close their budget gaps by raising taxes on "the rich."

Here's the problem for states that want to pry more money out of the wallets of rich people. It never works because people, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states.

And the evidence that we discovered in our new study for the American Legislative Exchange Council, "Rich States, Poor States," published in March, shows that Americans are more sensitive to high taxes than ever before. The tax differential between low-tax and high-tax states is widening, meaning that a relocation from high-tax California or Ohio, to no-income tax Texas or Tennessee, is all the more financially profitable both in terms of lower tax bills and more job opportunities.

Updating some research from Richard Vedder of Ohio University, we found that from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.

Did the greater prosperity in low-tax states happen by chance? Is it coincidence that the two highest tax-rate states in the nation, California and New York, have the biggest fiscal holes to repair? No. Dozens of academic studies -- old and new -- have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses.

As if to emphasize the point, news comes out of Maryland how badly their attempt to fix the budget by raising taxes has fared:

A year ago, Maryland became one of the first states in the nation to create a higher tax bracket for millionaires as part of a broader package of maneuvers intended to help balance the state's finances and make the tax code more progressive.

But as the state comptroller's office sifts through this year's returns, it is finding that the number of Marylanders with more than $1 million in taxable income who filed by the end of April has fallen by one-third, to about 2,000. Taxes collected from those returns as of last month have declined by roughly $100 million.

Many taxpayers in that bracket likely filed an extension and won't complete their returns until October, but a trend is emerging that indicates a "substantial decline" in the number of residents and small businesses with that kind of income, Comptroller Peter Franchot wrote in a letter to Gov. Martin O'Malley and legislative leaders.

Panel approves Maryland hospital cost increases "The revenue figures are ugly," Franchot said in an interview. "Right now, we're digging through a pile of tax returns and trying to understand this."

The recession provides an obvious explanation. Capital gains have become almost nonexistent as stock markets have tanked. Corporate executives have seen their salaries slashed. And small businesses, many of whom file individual income tax returns, have seen their profits gouged by the economic downturn.

Another more debatable explanation would be that millionaires have simply fled the Free State. While some say they have heard anecdotal evidence of the wealthy packing it up, officials say there's no proof yet of such a development.