In 2009, when then-New York Gov. David Paterson signed a temporary tax increase on the state's wealthiest individuals — one of the so-called “millionaire's taxes” that have passed in recent years in select states across the country — at least one multimillionaire was not happy. Rush Limbaugh proclaimed he was selling his condo and abandoning that state as a part-time residence.
While Limbaugh attempted to depict himself as part of a wider trend, new studies show that surtaxes on the wealthy do not cause an exodus. Moreover, surveys demonstrate that Limbaugh's unhappiness represents a minority position. With debate in Washington focused on reducing the federal deficit and states facing yawning holes in their budgets, few ideas garner more public backing than that of top earners stepping up to help cover the gaps.
In New York, 71 percent of residents surveyed in a recent Siena poll favored an extension of higher taxes on the state's wealthiest. “This has broad popular support ... Republicans and Democrats, conservatives and liberals, upstate and downstate,” says Sunshine Ludder of New York's Center for Working Families. “If you ask people whether they'd rather have a millionaire's tax or have a billion dollars cut from education and healthcare budgets, the numbers go even higher.”
Responding to similar sentiments at the national level, a group led by Illinois Democrat Jan Schakowsky introduced the Fairness in Taxation Act on March 16, which would create a federal millionaire's tax.
The tax code makes few distinctions among the top 3 percent. Households making $250,000 per year are subject to rates almost identical to those making hundreds of millions. The Fairness in Taxation Act would create new tax brackets, starting at $1 million and going up to $1 billion. “There's no reason to treat the wealthiest 1 percent any more specially than anyone else,” said Arizona Democrat Raúl Grijalva, co-sponsor of the House bill, “and right now that's exactly what our tax system is doing.” The measure would raise more than $74 billion this year, according to estimates by the Citizens for Tax Justice.
With a Republican majority in Congress, the chances of passing a greater levy on the rich at the federal level are slim. But that has not stopped advocates from pushing to reform tax codes in the states, which tend to do even less to separate middle-class families from the most affluent residents.
Since 2008, Connecticut, Hawaii, Maryland, New Jersey, New York, North Carolina, Oregon and Wisconsin have all enacted some version of a tax increase on top earners, with varying thresholds for when new rates kick in. The measure passed in New York in 2009 raised the state's top tax rate by 1 point for individuals with incomes over $200,000 (or over $300,000 for couples) and by just over 2 points for those with incomes over $500,000.
The impact of these changes has been significant. “They have been able to help states avoid some really deep and painful cuts in important public services — layoffs of teachers and firefighters — and helped them continue to adequately fund healthcare and other safety net programs,” says Carl Davis, senior analyst at the Institute on Taxation and Economic Policy.
Despite these benefits, almost all of the taxes on the wealthy passed in 2008 and 2009 were temporary. With these expiring, state legislatures are debating about whether surcharges should be extended. Yet the political climate for these drives has been inhospitable of late.
In Hartford, the Connecticut Business & Industry Association convinced Gov. Dannel Malloy that any additional increase on top of the new top rate of 6.7 percent will send wealthy residents fleeing. New York Gov. Andrew Cuomo joined Republicans to thwart a renovated millionaire's tax this spring. And in New Jersey, Gov. Chris Christie vetoed a similar measure in 2010, vowing to do so again this year.
When Oregon reported it collected substantially less from its tax on high earners during its first year than projected, the Wall Street Journal pounced, casting the discrepancy as the result of an entirely predictable choice by wealthy taxpayers to depart.
But information from Oregon's Legislative Revenue Office indicated that the decline in the number of millionaires had little to do with migration. It suggested people were simply making less money in a recession, thereby falling into lower brackets that were not subject to the new tax.
In April, Jeffrey Thompson of the Political Economy Research Institute at the University of Massachusetts published an analysis of IRS migration data in New England. Pointing out that “more than half of American adults have never lived in any state other than where they were born,” the report demonstrated that migration across state lines is rare and taxes have little role in people's decisions to move.
“These papers show that while state policy-makers may be afraid of taking the steps to generate revenue, some of their worst fears are unlikely to be realized,” Thompson says.
The billions already collected from taxes on top earners are hardly insignificant for cash-strapped states, and these measures could be even more vital in the long term.
“With so much income growth having been concentrated at the upper end of the scale, calibrating your tax system to take account of that fact is a good thing,” Davis says. “If millionaires continue to do as well in the years ahead as they have in years past, these can become very effective revenue-raising measures.
A version of this article appeared in slightly different form in The Nation.