Raising state taxes on the rich does not cause them to leave and results in substantial new revenue, according to a new report that busts a common myth advanced by opponents of tax increases New Jersey needs to support vital services. Americans move from state to state for a variety of reasons, but tax rates rarely factor into such decisions.
Attacks on sorely-needed increases in state tax revenues often include the unproven claim that tax hikes will drive large numbers of households — particularly the most affluent — to other states.
“This claim is false. The effects of taxes on migration are, at most, small — so small that states that raising income taxes on the wealthiest households will see a substantial net gain in revenue.” said Robert Tannenwald, co-author of the report and a senior fellow at the Center on Budget and Policy Priorities, a Washington, DC-based nonpartisan, nonprofit policy research organization that published the new report.
In the most carefully designed study to date, sociologists at Stanford University looked at the effect of New Jersey’s 2004 tax increase on people making more than $500,000 per year. They found that while the number of people leaving the state in this income group increased very slightly after the tax increase went into effect, the number was insignificant because people unaffected by the new tax were moving at a similar rate. The end result was that the new tax rate produced a large increase in revenue for the state without prompting people to leave.
The report also examines the Boston College study commissioned by the New Jersey Chamber of Commerce last year. This study has been used as proof by opponents of progressive taxes that high income people are leaving New Jersey because of the state’s income tax structure, despite the fact that the author acknowledged no tax impact. The CBPP report reiterates that most of the people examined in this study had incomes of less than $500,000 and thus were not subject to the state’s highest marginal income tax rates.
The report cites numerous examples of research debunking the migration myth and, through case studies, shows how misinformation about the impact of taxes on migration can influence policymakers and the media. Those who support the migration myth often wrongly assume a cause and effect relationship, promote irrelevant findings, and inaccurately measure migration, the report found.
“As we focus on creating new jobs and getting our economy back on track, it’s clear residents are not running away from our state if we take a balanced approach that includes new revenues,” said NJPP President Deborah Howlett. “False claims like this shouldn’t deter policymakers from making the right choices for New Jersey.”
Few Americans move between states, according to the report. And the little interstate-migration that does occur is more frequently due to job opportunities and housing prices than tax rates. Specifically, the report illustrates that housing costs may have a significantly larger impact on Americans’ finances than tax levels. This should come as no surprise to New Jersey residents.
“Investing in our state’s future is more important than ever right now and that’s why it’s important not to rely on flawed information about the effect of taxes on residents’ decisions about where to live,” said Howlett. “Failing to raise the resources needed to maintain strong schools and universities, safe communities, and quality roads and bridges will hurt us now and in the long run.”
The Center’s full report can be found here.
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