Paul L. Caron

Friday, March 12, 2010

WSJ: Maryland 'Millionaire's Tax' Causes Decline in Revenue from Rich as 12% Flee the State

Wall Street Journal editorial, Maryland's Mobile Millionaires: Income Tax Rates Go Up, Rich Taxpayers Vanish:

Illinois Governor Pat Quinn is the latest Democrat to demand a tax increase, this week proposing to raise the state's top marginal individual income tax rate to 4% from 3%. He'd better hope this works out better than it has for Maryland.

We reported in May that after passing a millionaire surtax nearly one-third of Maryland's millionaires had gone missing, thus contributing to a decline in state revenues. The politicians in Annapolis had said they'd collect $106 million by raising its income tax rate on millionaire households to 6.25% from 4.75%. In cities like Baltimore and Bethesda, which apply add-on income taxes, the top tax rate with the surcharge now reaches as high as 9.3%—fifth highest in the nation. Liberals said this was based on incomplete data and that rich Marylanders hadn't fled the state.

Well, the state comptroller's office now has the final tax return data for 2008, the first year that the higher tax rates applied. The number of millionaire tax returns fell sharply to 5,529 from 7,898 in 2007, a 30% tumble. The taxes paid by rich filers fell by 22%, and instead of their payments increasing by $106 million, they fell by some $257 million.

Yes, a big part of that decline results from the recession that eroded incomes, especially from capital gains. But there is also little doubt that some rich people moved out or filed their taxes in other states with lower burdens. One-in-eight millionaires who filed a Maryland tax return in 2007 filed no return in 2008. Some died, but the others presumably changed their state of residence. (Hint to the class warfare crowd: A lot of rich people have two homes.)

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Maryland is more prone to this than California since the many high-income residents who work in DC proper can quite easily vault over the Potomac to live in Arlington or Fairfax Counties in Virginia. In fact, given its odd shape, there are no Maryland job markets that are very distant from a lower-tax state, whether Delaware, Pennsylvania or W. Va. So the figure given for fleeing residents is believable to me.

This would not be as big an issue in most other states -- the sole other example of a major city wedged directly between two other states, NYC, has been "double-teamed" by CT and NJ, which have both cranked up their income tax rates.

Posted by: Roger | Mar 18, 2010 8:52:20 AM

Comparing Maryland to the national average would be more convincing than just asserting "little doubt". Unfortunately 2008 IRS data aren't out yet, but they could have at least used another state as a crude control group. For one example, California had the same rate in 08 as in 07, and preliminary data indicate that the number of returns reporting $1m or more income fell from 55k to 42k (24%) and their liability fell from $19.0b to $12.5b (34%).

Posted by: sacman701 | Mar 17, 2010 10:41:16 AM

Looks like another task for Obama. States need to realize they need the Federales to trap every millionaire in every state. We need "Federal Law". That way, the millionaires will just leave the country and takes their money with them or just pull it out of the banks and wait. Lets give that one a whirl Big O

Posted by: robertsgt40 | Mar 12, 2010 10:53:01 AM