(Bloomberg) – When it comes to taxes, millionaires often have short fuses. Ratchet up their rates and they're likely to blow you off and move to a low-tax, or no-tax, state.
Or so goes one argument against taxing the rich: States that levy a “millionaires tax” risk chasing those millionaires away to Florida, Texas and other places with no income tax. Hedge fund manager David Tepper's recent decision to move to Florida from New Jersey, possibly creating a billionaire-size hole in Jersey’s budget, raised alarms.
Golf great Phil Mickelson, shortly after his infamous Dean Foods stock trade, complained about his high tax rate in California and threatened to move to Florida.
But a new study based on 13 years of tax data finds that most millionaires don’t rip up their roots and move just to avoid a tax bill. It turns out that the superrich, while perhaps different from the rest of us, aren’t all that mobile. When they do move, it’s often for reasons that have nothing to do with taxes. For one thing, they appear to like the beach.
The study, published in the June issue of the American Sociological Review, suggests that states – and countries – may have some leeway to raise taxes on the wealthy without scaring away their tax base. It has obvious political implications, possibly serving as ammunition for those who favor taxing the rich. It could help advance the arguments of Democratic presidential candidates Hillary Clinton and Bernie Sanders, for example, who have both proposed higher taxes on upper-income Americans.
It could also influence voters who, in as many as four states – California Colorado, Maine and Minnesota – will decide in November whether to raise taxes on residents in the top brackets.
Rich people do move for tax reasons, but only about 2.2% of the time, the study estimates, with little impact on revenues in the states they leave behind. If states increase their top tax rate by 10%, they risk losing just 1% of their population of millionaires, the researchers found, using a statistical model based on millionaires' past movements from state to state.
“Millionaire tax flight is occurring, but only at the margins of significance,” write the authors, Stanford University sociology professor Cristobal Young, his Stanford colleague Charles Varner, and two U.S. Treasury Department economists, Ithai Lurie and Richard Prisinzano.
The researchers analyzed 45 million tax records, covering every filer who reported income of at least $1 million in any year from 1999 to 2011, and found that the rich are in fact less likely to move around than the poor. Typically, about a half-million households report such income, and only 2.4% of these taxpayers move from state to state in any given year. That compares with 2.9% of the general population and 4.5% of those earning just $10,000 a year.
Why are the wealthy, with all their resources, more likely to stay in one spot? The study notes that millionaires are likelier to be married, have kids and own businesses, all conditions that tend to make moving more difficult. Wealthy people often form deep roots in their communities, ties that helped them succeed in the first place.
“Most millionaires are the ‘working rich,’ ” the study notes, with wealth that flows from the particular places where they’ve built business relationships. For a certain kind of tech entrepreneur, low-tax New Hampshire and Tennessee are no substitute for Silicon Valley. Wall Street lawyers need to stay near Wall Street. For a famous actor or director, Hollywood, Fla., is nothing like Hollywood, Calif.
The study also looked at regions of the country where it is easy for taxpayers to commute daily across state lines from low-tax states to high-tax states. Residents of Portland, Ore., for example, must pay a top state tax rate of 9.9%, while across the river in Vancouver, Wash., there’s no income tax at all. You would expect people of means to live on the low-tax side. Yet in these easily commutable border areas, “the difference in millionaire population at the state border is not significant,” the study concludes.
As for the jet-setting millionaire who has breakfast in Miami, spends the day in Manhattan, and wakes the next morning in his Idaho compound, changing where you’re taxed isn’t as simple as putting a different address on your 1040 form. States such as New York often demand proof from wealthy residents that they really have uprooted their lives and are spending more than half the year out of state.
One curious finding was how much the wealthy seem to like Florida. The Sunshine State is one of seven with no income tax, yet it accounts for almost all the tax-influenced migration the authors detected. Meanwhile, Texas, Tennessee and New Hampshire didn’t appear to be drawing millionaires away from higher-tax states. In fact, when Florida is excluded from the analysis, there is “virtually no tax migration” by millionaires.
The authors can only guess why the rich prefer Florida. “It is the only state with coastal access to the Caribbean Sea,” they note, but “it is difficult to know whether the Florida effect is driven by tax avoidance, unique geography or some especially appealing combination of the two.”
Of course, lounging under a palm tree can be even more relaxing when it comes with a tax break. You don't have to be a sociologist to know that.
