Taxes have unintended consequences

The following article appeared on The Tax Foundation blog, and it references Maryland losing revenue from millionaires, even though it raised taxes. We have seen this in multiple guises and I’d like to suggest that as taxes rise on the federal level, corporations will be incentivized to locate elsewhere. Additionally, foreign entrepreneurs will be more reluctant to base operations in the US. These impacts are generational and are relatively slow (although the impact on Maryland was yoy).

Maryland’s Millionaires Missing After Income Tax Hike

by Joseph Henchman

In 2008, Maryland added four new income tax brackets, 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 recession is certainly a contributor: everyone is earning less. But the Comptroller did an interesting additional analysis: how many people filed as millionaires before the tax 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 base 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 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.

For the full article, click here.

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