Tuesday, May 19, 2009

Soak the Disappearing Rich – No, We Can’t

It looks like the golden goose has already fled the Northeast, according to a study done by the Manhatten Institute.

The Wall Street Journal reports: “Finally, there is the issue of whether high-income people move away from states that have high income-tax rates. Examining IRS tax return data by state, E.J. McMahon, a fiscal expert at the Manhattan Institute, measured the impact of large income-tax rate increases on the rich ($200,000 income or more) in Connecticut, which raised its tax rate in 2003 to 5% from 4.5%; in New Jersey, which raised its rate in 2004 to 8.97% from 6.35%; and in New York, which raised its tax rate in 2003 to 7.7% from 6.85%. Over the period 2002-2005, in each of these states the "soak the rich" tax hike was followed by a significant reduction in the number of rich people paying taxes in these states relative to the national average. Amazingly, these three states ranked 46th, 49th and 50th among all states in the percentage increase in wealthy tax filers in the years after they tried to soak the rich.”

After the New Jersey tax hike, the report notes, “there were 4,000 missing half-millionaires in New Jersey,” which now has one of the largest budget deficits in the US.

Some of the plucked rich moved out of state; those that remained reported less taxable income on their returns; and people who might have moved into high tax states had second thoughts. Many of the newly impoverished states have had a rough time holding their graduates because they moved in search of jobs that were disappearing in the high tax states.

The study also disputes the notion that low tax states cannot offer necessary amenities, such as good schools.

Wrong, say the authors of the report: “… and New Hampshire is our favorite illustration. The Live Free or Die State has no income or sales tax, yet it has high-quality schools and excellent public services. Students in New Hampshire public schools achieve the fourth-highest test scores in the nation -- even though the state spends about $1,000 a year less per resident on state and local government than the average state and, incredibly, $5,000 less per person than New York. And on the other side of the ledger, California in 2007 had the highest-paid classroom teachers in the nation, and yet the Golden State had the second-lowest test scores.”

Pro-growth states fare better in a global economy: “Texas created more new jobs in 2008 than all other 49 states combined. And Texas is the only state other than Georgia and North Dakota that is cutting taxes this year.”

States that do not learn from this history eventually will be faced with two unappetizing choices: Cut costs or impose taxes on the remaining tax payers left when the rich have fled to more prosperous, less tax punishing environments.

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