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Eric L. Davis: Tax rates rarely force exodus of the rich

Nearly every year, Progressive and some Democratic legislators propose increasing the income tax on the highest-income Vermonters — those whose economic situation has improved the most since the 2008 financial crisis — in order to provide more resources for state programs that serve low- and middle-income Vermonters. 
The response to these proposals — from nearly all Republicans and from some Democrats — is that such tax increases will end up hurting the state because wealthier Vermonters will move away if their taxes are raised. The response is often accompanied by an anecdote about a well-off Vermonter who recently moved to Florida or another low-tax state. 
Many academic studies of the impact of state tax rates on interstate moves have been completed in the last five years. The consensus of these studies is that changes in income tax rates have very little impact on affluent taxpayers’ decisions about where to live.
A comprehensive study using IRS and Census Bureau data concluded that, in any given year, there are approximately 500,000 tax returns filed nationally by households reporting income of $1 million or more. About 12,000 of these households move from one state to another each year. This represents a migration rate of 2.4 percent, lower than the 2.9 percent interstate migration rate for the entire American population.
Of those affluent households that do relocate, approximately the same number move each year from a lower-tax state to a higher-tax state than vice versa. The principal reason for these moves is job-related: corporate executives and professionals are reassigned to a new position, or take a position with a new firm. 
There is little evidence that entrepreneurs’ decisions about locating new firms are affected much by state income tax rates on high earners. Far more important are considerations related to the availability of a workforce with the proper skills, transportation and communications infrastructure, and the state’s regulatory climate.
For middle-income retirees, interstate moves are much more often affected by climate and proximity to children and grandchildren, rather than by variations in state income tax rates. State legislatures can change tax rates, but they cannot make northern winters less cold. There is also some evidence that local property tax rates and other factors associated with the cost of housing, not income tax rates, are a determinant in retiree households’ residential decisions.
The research does conclude that raising taxes on the most affluent households is likely to introduce additional volatility into state budgets. In years in which business profits and financial markets perform strongly, tax receipts will be considerably higher than in years in which profits and markets are weaker. The best policy response to such volatility is for states to have rigorous provisions for rainy-day funds in their budgets, so that some of the extra revenue collected in strong years is set aside to use in years in which the economy will underperform.
The issue of raising state taxes on wealthier Vermonters may arise in response to federal budget cuts. All of the Republican health care bills being considered in Washington would cut federal reimbursements to Vermont for Medicaid and Dr. Dynasaur by several hundred million dollars over the next decade. These programs cover more than a third of Vermont children, a high percentage of Vermont elders, especially the chronically ill, and represent a critical revenue stream for the state’s community hospitals and nursing homes. 
The Legislature may well consider increasing taxes on the wealthiest Vermonters, who will also be the primary beneficiaries of the tax cuts in the Republican health care proposals, in order to make up some of the federal budget cuts. If so, that issue should be debated on its merits, without recourse to the unproven assertion that tax increases will lead affluent Vermonters to move out of state.
Eric L. Davis is professor emeritus of political science at Middlebury College.
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