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Monday, July 22, 2013

Faber: 'Ivory Tower' Economists Are Wrong: Taxes Play Major Role in Wealthy Fleeing High-Tax States

Tax Analysts Peter L. Faber (McDermott Will & Emery, New York), Taxes Play Major Role in Moving Out of State, 69 State Tax Notes 243 (July 22, 2013):

Amy Hanauer and Tim Krueger argue that taxes play no role in taxpayer decisions to move from one state to another (The Tax Flight Myth: People Move for Jobs and Family, Not Taxes, State Tax Notes, July 8, 2013, p. 97 ... ). Their conclusions are apparently based on empirical studies and computer models. They are wrong. Based on my experience as a practitioner who works with wealthy individuals and corporations every day, I can assure you that taxes often play a major role in these decisions and that in many cases, they are the sole reason for the move.  ...

The authors claim that they have been able to show the effect of taxes "while holding other conditions constant." How did they do that? Get real, folks. There are limits on what economists' computers can do. It is impossible to do this, no matter how many computer simulations one does. ...

My experience, and that of my SALT colleagues, is that taxes often play an important and decisive role in decisions to move from one state to another. Moreover, that is particularly the case for very wealthy individuals whose loss can be significant for a state. I am currently working with three wealthy individuals who have come to my firm for advice on how they can change their domicile from New York state to a low-tax state. When they do so, New York will lose between $70 million and $225 million in estate taxes (the variance will depend on which spouse survives the other). New York will also lose income taxes on their very substantial incomes. I assume that people in Ohio and other high-tax states are going through the same analysis. The issue with my clients is not whether to move, it is how to move so as to establish the change in legal domicile. We are going through the usual list of factors that the courts have considered in determining domicile (driver's license, club memberships, religious affiliations, civic activities, etc.). These people will move, and their moves will cost New York millions of dollars in taxes....

The economists can play all the number games they want to with their computers, their calculus, and their fancy equations, but they are still living in their ivory towers. The reality that my colleagues and I deal with every day is very different.

For a particularly timely example, consider yesterday's British Open champion Phil Mickelson:  Forbes: Phil Mickelson Wins British Open---And California Taxes It:

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Comments

It sounds like the author's three wealthy clients are not actually moving, but just rearranging their drivers licenses, club memberships, etc. to make it look like they did.

Posted by: Justin | Jul 22, 2013 4:08:15 AM

The authors of the original study claim to have found no statistacal significance to support the claim that high taxes cause emigration. Faber's response: I personally know people who do move because of taxes, therefore the original study must be wrong. This is as sound as arguing that smoking doesn't cause lung cancer because I personally know people who smoke and don't have lung cancer.

Posted by: Guy2 | Jul 22, 2013 5:01:29 AM

Ask CPAs in Ohio and Michigan.

Clients used to go south after retirement. The move is getting earlier and earlier.

Posted by: save_the_rustbelt | Jul 22, 2013 6:04:54 AM

My daughter moved to FL three years ago. As a consequence we are planning to live in FL half the year and in Ohio (Portage Lakes) in the summer. Because of the tax laws we will be sure to spend 6 months and a day in FL and do whatever else it takes to avoid Ohio's income tax.

I know a retired couple who chose southeast Michigan over Ohio for tax reasons.

Then there is the case of good ole flaming liberal Howard Metzenbaum, a former Ohio senator and parking lot magnate, who moved to FL and died there. I wonder why.

Posted by: Charles R. Williams | Jul 22, 2013 8:04:48 AM

The plural of anecdote is not data.

That being said, even the best designed academic study often fails to capture what is happening in the real world. This reminds me of a paper by the famous Vic Fleischer that stated that corporate tax rates had no impact on corporate planning. You wonder sometimes if these people ever actually talked to decision makers at companies.

Posted by: Todd | Jul 22, 2013 8:23:17 AM

Progressives claim that global warming exists because their self-derived models say so -- despite not being suppported by historical records. What's true is that they have an alternate agenda. When they can't find actual proof for their causes, like high taxes not affecting personal decisions, they create a phony model. At least the author can provide real people with a supportive explanation rather than made-up studies.

Posted by: Woody | Jul 22, 2013 8:47:44 AM

Taxes are what we pay to live in a civilized society. Of course the corollary is that taxes are what we don't have to pay to live in Texas.

Posted by: Bob | Jul 22, 2013 9:38:12 AM

Hmmm...maybe New York also gains wealthy people?

Posted by: Anonymous | Jul 22, 2013 9:46:14 AM

Bob, taxes are what you pay to live in Detroit.

Posted by: Woody | Jul 23, 2013 7:35:15 AM

After watching the federal government manipulate statistical data ( rather than merely report it) based on politics or ideology to reach a desired result, I am no longer surprised about any statistical analysis. I am not saying that there is anything improper or nefarious about Amy Hanauer and Tim Krueger article nor do I doubt they believe their results. But like Peter Faber, I believe the analysis is counterintuitive and clearly conflicts with a plethora of data including the numerous snow bird cases and the wide spread experience of tax attorneys and accountants with high income individuals.

Posted by: Stan | Jul 31, 2013 6:35:13 AM

I agree with Todd. This is not a true statistical sample. The empirical evidence may not be perfect, but I would follow that over a single practioner's clients.

Posted by: Scott H | Aug 9, 2013 7:25:54 AM

Actually Scott that was not my intended message. While a few anecdotes do not constitute authoritative evidence, neither does the best-designed study.

When there are many variables involved no statistical modeling can truly capture everything, global warming being a prime example. As noted above, if you interviewed tax professionals I am sure you would find the vast majority could list out clients whose behavior is impacted by tax rates to a significant degree. I work in corporate tax at one of the Big 4, and I can certainly attest to this.

As I said, I wonder sometimes if these academics ever actually talk to real live people as a check on their modeling.

Posted by: Todd | Aug 9, 2013 9:46:35 AM

I agree. States and municipalities need to get with the program. I would never move to CA, IL or NY which are three of the highest tax states in the union. These states lack the leadership and comprehensive plan to provide for efficient and productive policy and services to move their state forward. A number of their local, state and national representatives have failed to make pro-active changes in this regard to provide value for services received through the payment of all taxes they have on the books. One only needs to add up all the taxes they pay and compare it to the income earned to get the message.

Posted by: Richard Bosler | Aug 10, 2013 10:33:48 AM