Facts and myths about taxes

By Jack Hoffman, Rutland Herald, August 7, 2011

Do wealthy residents move if they are asked to pay more in taxes? Another reliable report — the fourth this year — says they do not. This latest was from the Center on Budget and Policy Priorities in Washington, D.C. It was both a review of recent studies that show no or weak connections between taxes and people’s moving from state to state and an analysis of cases where data about taxes and migration have been misused.

“This claim (about tax flight) is false,” said Robert Tannenwald, former vice president of the Federal Reserve Bank of Boston and one of the co-authors of the report. “The effects of taxes on migration are, at most, small — so small that states that raise income taxes on the wealthiest households will see a substantial net gain in revenue.”

There is good recent evidence to support Tannenwald:

— “The Impact of Taxes on Migration in New England,” by economist Jeffrey Thompson at the Political Economy Research Institute in Massachusetts, analyzed data from all 50 states and found that migration had a strong correlation with the availability of jobs and affordable housing and essentially no relationship to taxes.

— “Millionaire Migration and State Taxation of Top Incomes: Evidence From a Natural Experiment” by Cristobal Young of Stanford University and Charles Varner of Princeton University, found no difference in moving patterns between those people who were affected by New Jersey’s millionaires tax and those who were not.

— The final report of Vermont’s own Blue Ribbon Tax Structure Commission found that, for at least the past 16 years, people moving to Vermont consistently have higher incomes than those who move out of the state each year.

Gov. Jim Douglas liked to tell stories about Vermont taxes driving rich people out of the state. His successor reads from the same script. It’s a common myth, told again and again.

But as the results of these studies suggest, for most people decisions about where to live are not so simplistic. If they were, we’d all live in New Hampshire or Florida. In fact, what makes states attractive is the better schools, lower crime rates, better infrastructure and quality of life that typically come with greater public investment. All those positives describe Vermont. If wealthier people are coming here, not fleeing, we must be doing something right.

Gov. Peter Shumlin has said Congress should increase taxes on wealthy Americans to address our federal budget problems. But after the events of the last few weeks, it should be clear that that is unlikely to happen with this president or this Congress. So Vermont, and all of the other states, are left with the responsibility of paying for the necessary services that Congress refuses to fund. That means raising the taxes that Washington refuses to raise.

Vermont has the resources. Thanks to Washington’s extension of the Bush tax cuts in December, the top 5 percent of Vermonters are saving $190 million on their federal taxes this year and a like amount next year. As Vermont prepares to enter the next budget cycle with the prospect of reduced federal funding, it is important that decisions about spending and taxes be grounded in reality, not myths.