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Super-rich stay put in high-tax states

By Mike Rosenberg, San Jose Mercury News –

SAN JOSE, Calif. — Some of us might love to hate ’em, but states with a high proportion of millionaires need them to stay — or they would lose tens of billions of dollars in tax revenue that pays for things like education and public safety.

So should Californians be freaking out that rich people will flee if the state’s residents vote to raise their taxes in November?

Maybe not.

An analysis by the San Jose Mercury News of IRS tax-return data shows that states that charge high income taxes — from California to New York to New Jersey — are home to the highest number of rich people per capita. And two-thirds of the states that don’t charge any income taxes actually have fewer numbers of millionaire residents per capita, the analysis shows.

Consider Florida and Texas, which are often cited as havens for rich movie stars, CEOs and athletes because they are income-tax free. California, on the other hand, has the nation’s second-highest income tax rate.

So in those three states, how many people earn at least $1 million a year for every 100,000 taxpayers?

Florida: 202. Texas: 217. California: 252.

In the past 15 years, California has maintained the same share of the nation’s ultrarich, even after voters passed the state’s first “millionaires’ tax” in 2004. That echoes the experience documented in studies of other states that have raised taxes on the wealthy.

“There just isn’t any persuasive evidence out there to make you think that there would be a significant number of Californians moving because of this tax change,” said Carl Davis, senior policy analyst at the Institute on Taxation and Economic Policy, a nonpartisan research group based in Washington.

Last year, Stanford University sociology professor Cristobal Young and Princeton University Ph.D. candidate Charles Varner found that a 2004 tax increase on New Jersey’s wealthy had zero impact on the number of rich people in the state.

“They place substantial investments in building businesses and social networks in these communities and a small, couple-percentage points of extra tax just isn’t in any way enough to prompt them to move out of state,” Varner said.

Opponents of the proposed higher taxes in California, however, point to anecdotal evidence of millionaires fleeing California and note that more workers overall have been moving out of the Golden State than into it over the past several years.

“At some point the tax and regulatory burden starts driving the decision” to move, said Jon Coupal, president of the Howard Jarvis Taxpayers Association and co-chairman of a campaign against the tax increases. “I hear every day from people who say if Proposition 30 passes, it’s the last straw.”

San Francisco Bay Area native David Friedman, president of Wealth-X, a global Singapore-based consulting firm focused on the ultrarich, said it depends on what profession the millionaire is in.

“Think about the venture capitalist who lives in Woodside (Calif.): He’s not moving,” Friedman said. “But the person launching a new company will at least consider it.”

Rich people pay a federal income-tax rate of as high as 35 percent but a much lower rate, usually less than 10 percent, on state returns.

Some wealthy people like GOP presidential candidate Mitt Romney have avoided high federal taxes by earning most of their money through capital gains, which are taxed at a maximum rate of 15 percent. But in California capital gains are taxed at the same rate as wages.

Like other states, though, California has discovered that steep tax bills don’t seem to scare off the rich.

“There’s no empirical evidence that top income earners change states in response to tax increases of small magnitude like the one they’re talking about in California,” said Varner, the Princeton researcher. “There’s just an economic theory.”



The San Jose Mercury News review of tax return data for 2010, the most recent year for which data are available, found no link between the state income tax rate and the number of people who reported adjusted gross income of at least $1 million.


—The states with the most and fewest rich people per capita are Connecticut and West Virginia, respectively. In Connecticut, one of 190 taxpayers earns at least $1 million in adjusted gross income. In West Virginia, just one out of every 1,400 filers make that much. Yet both states tax rich people about the same.

—Out West: Nevada is income-tax free; Oregon has one of the nation’s highest income taxes on the rich; and Arizona is about average. Yet all three have a below-average number of rich people per capita.

—In the Midwest: Illinois and Ohio charge about the same income-tax rates and have similar populations. Yet Illinois has 233 millionaires per 100,000 taxpayers, while Ohio has 107 per 100,000 taxpayers.

—In the Northeast: Massachusetts has more than double the millionaires per capita than neighboring New Hampshire, which is income-tax free.

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