Study says concerns about ‘tax flight’ by wealthy are unfounded

The longstanding claim that tax hikes will drive people out of Connecticut was quick to resurface earlier this year as politicians and special interest groups reacted to more than $1.6 billion in state and municipal increases ordered by the legislature and Gov. Dannel P. Malloy.

But a new study by a Washington, D.C.-based fiscal policy research group concluded that tax hikes have little effect on migration. The analysis prepared by the Center on Budget and Policy Priorities also found that poor public education and a lack of affordable housing–problems that can be worsened by levying too little in taxes–were more likely to drive residents to another state.

“Attacks on sorely needed increases in state tax revenue often include the unproven claim that tax hikes will drive large numbers of households–particularly the most affluent–to other states,” center researchers Robert Tannenwald, Jon Shure and Nicholas Johnson wrote. But “the effects of tax increases on migration are, at most, so small that states that raise income taxes on the most affluent households can be assured of a substantial net gain in revenue.”

Citing migration research from the Journal of Economic Perspectives, the study notes that just 1.7 percent of U.S. residents moved from one state to another annually between 2001 and 2010, and only about 30 percent of U.S. natives change their state of residence over their entire lifetime.

Numerous academic studies of migration trends “make clear that people move for many complicated, interrelated reasons,” the report continues, noting that moves within a community or metropolitan area are much more common than migration across several state lines. “It takes a lot to get someone to move a long distance.”

Those that do make such journeys, the study reported, generally do so for larger economic motives than tax hikes, such as a new job or much cheaper housing.

The difference between tax burdens, once local and state taxes are taken into account, typically varies by just a few percentage points across state lines. For example, the average state-and-local tax burden on a middle-income family ranged in 2007 from 11 percent in states with higher taxes to 6.7 percent in states with low burdens.

“In contrast to the small tax benefit from relocation, moving in search of cheaper housing can have a far bigger payoff,” the report states.

“We don’t claim that (affordable housing) is the only factor” behind where people choose to live, David Fink, policy director for Partnership for Strong Communities, a Hartford-based nonprofit, said Wednesday. “But it’s the single-largest factor.”

Fink said that since 2000, Connecticut has ranked 48th out of 50 states in terms of new housing units built per capita. And with housing prices and rental costs here remaining high, this has contributed to the lack of population growth in Connecticut over the past decade.

Florida is typically cited by tax critics in Connecticut as a population destination because  it still lacks an income tax. But migration into Florida slowed in the middle of the last decade as housing prices rose and has reversed itself since 2008 as the economy collapsed, the study says.

A study by Stanford University sociologists of the 2004 New Jersey state income tax increase on households earning more than $500,000 found that while net migration of this group increased afterward, so did the migration rate of filers within incomes between $200,000 and $500,000 — by nearly the same amount.

The Stanford study estimated 70 filers earning more than $500,000 left New Jersey between 2004 and 2007 because of the tax increase, costing the state $16.4 million, while the revenue gain to New Jersey over those years was $3.77 billion.

“These departing ‘uber-rich’ were so few in number that their out-migration barely affected the revenue gain,” the Center on Budget and Policy Priorities wrote. “Policymakers and members of the media should be cautious, therefore, in drawing conclusions from anecdotal evidence of tax-induced flight.”

But the top House Republican on the Connecticut legislature’s tax-writing committee said the center’s report ignores other tax-hike-driven changes that ultimately force people out of state.

Companies routinely weigh tax hikes heavily when deciding not to create jobs, or to relocate them to facilities in other states, Rep. Sean Williams of Watertown, ranking member on the Finance, Revenue and Bonding Committee, said.

And while the center’s methodology might conclude many people left Connecticut to pursue other work, there’s a good chance that tax policy was behind both the jobs found out of state and the work that couldn’t be found here.

“We’re seeing it every day: the quality and quantity of jobs that are leaving the state, and the quality and quantity of jobs that are entering the state,” he said.

“There are a lot of things that affect whether people leave Connecticut,” he said, adding that just because a job change is cited as driving factor behind migrations “doesn’t mean we did the right thing in passing one of the largest tax increases in state history.”

Williams and his other Republican lawmakers opposed the $1.6 billion in state and municipal tax hikes that Malloy and his fellow Democrats in the legislature’s majority used to help close the $3.67 billion deficit built into the 2011-12 fiscal year.

The linchpin of that tax plan, an across-the-board income tax hike designed to raise nearly $900 million extra this year, fell particularly hard on small businesses, added Joseph F. Brennan, senior vice president of the Connecticut Business and Industry Association.

Many small businesses report their profits through the income tax rather than the corporation levy, Brennan said, noting that those with incomes of more than $700,000 paid the new top rate, 6.7 percent, on all of their earnings.

“Those tax increases mean there’s less money for business investment,” he added. “It’s hard to believe it has no significant impact.”

Rep. Patricia Widlitz, D-Guilford, co-chairwoman of the Finance committee, said she believes Democrats carefully balanced tax hikes needed to help close the deficit with their impact on the economy.

The potential for tax hikes to encourage migration” is a factor that we certainly discussed,” Widlitz said, adding that lawmakers also were concerned about the need to stabilize the budget and protect crucial program areas like education and health care. “We have a very high quality of life here, some good services and a beautiful state with many natural resources. … I think people tend to look at the whole package.”