Will the Rich Take Their Rolls?

Do we need a “millionaire’s tax” to solve New York’s budget crisis? Advocates of the tax say we do because New York doesn’t make the rich pay their fair share.

Opponents say that is not true and counter that hiking taxes on the very wealthy will only cause them to move out of state, depriving Albany of hundreds of millions, if not billions in tax revenue.

So who’s right? Get Real cuts through the crap and tells the truth:

New York State taxes are too regressive meaning the rich don’t pay their fair share.

That’s the claim and in one sense it is accurate — the wealthiest pay a smaller share of their income in total state and local taxes than do people with lower incomes. But in another sense the statement is actually pretty silly. Read on.

Advocates cite statistics from the Institute on Taxation and Economic Policy showing that the “effective tax burden” on the poorest fifth of New Yorkers is 12.6% (the highest for any group) and just 6.5% for the wealthiest 1%.

That’s interesting but these numbers represent the tax burden including ALL state and local taxes – including real estate and sales taxes. Not just income tax. Advocates also point to this:

That’s also interesting and accurate but only half the story – think about it: On one hand we learn people making 40K a year are paying the same tax rate as a millionaire while on the other we are told millionaire’s pay just half the tax rate of someone making a working class wage. Both are technically correct but neither prove that New York State’s taxes are particularly regressive.

For instance EJ McMahon of the conservative Empire Center for New York State Policy points out that:

“Exemptions, deductions and credits—which are phased out or capped for high-income taxpayers—play as large a role as the marginal tax rate in determining taxes for most families.  Middle-class New Yorkers pay lower graduated rates on the first $20,000 to $40,000 of their income, while those earning more than $150,000 pay a flat rate of 6.85% on all income. Thus, for example, a family of four earning $60,000 pays an effective rate of 2.5% (about $2,100), while a family with income of $1 million pays an effective rate of more than 6% (over $60,000).”

In other words the rich pay a higher effective income tax rate than the middle and working classes.

McMahon uses different stats to try and refute the advocates’ contentions about NY’s allegedly regressive taxes: “The highest-earning 1% paid 41% of income tax in 2007, up from 26% in 1994.  The top 1% will still be paying 35% this year, despite income and market losses.”

McMahon’s numbers demonstrate that as the rich have gotten much richer they have paid more in total taxes, which is also interesting, but it too does not directly address the issue:
Are New York State’s taxes regressive?

The answer seems to lie in another chart that advocates have included in their presentations – the same chart as the first one we showed you but with a breakdown of which taxes make up the “effective tax burden.”

Note that the lowest-earning fifth of New Yorkers do not pay income taxes at all and in fact get money from the state thanks to the nation’s most generous Earned Income Tax Credit. Note also that the income tax burden increases as the groups get wealthier. What’s interesting here is that the poorest fifth of the population pay the highest effective state and local tax rate and that’s because of sales and excise taxes. This group spends the largest share of its income on taxable goods (which makes sense since the working poor often live paycheck-to-paycheck while millionaires are able to live well and save large amounts of their earnings).

Advocates say that is precisely the point – the poor pay the biggest share of their income on taxes overall and that is regressive. But that’s because New York’s sales and property taxes are among the highest in the nation. Sales taxes are indeed considered regressive (poor pay higher percentage of their income than rich) but property taxes are less so.

So what’s the answer?

New York’s reliance on sales and real estate taxes coupled with a relatively high income tax puts more of the tax burden as a share of income on those in the lower-earning three-fifths of workers. That does make the state’s tax policies regressive but compared to taxpayers in other states not remarkably so.

More directly to the point – and why the claims made for a millionaire’s tax are more smoke than fire: If we want to make the income tax more progressive, ought we not also lower the sales tax to make it less regressive? After all, New Yorkers who are in the bottom fifth of the income ladder don’t even pay income taxes. Making the rich pay more won’t change that. On to the other major claim….

Wealthy New Yorkers will flee the state if their income taxes are hiked.

Governor Paterson has most famously used this argument to explain why he was opposed to a millionaire’s tax. But there’s strong evidence to suggest that’s unlikely to happen.

Both sides like to use New Jersey as an example and for good reason. In 2004 the Garden State hiked it’s top income tax rate from 6.35% to 9% on those making more than a half-million bucks a year. What happened? Depends on who you ask.

The Fair Share Tax Reform group cites a study done late last year by Princeton University’s Policy Research Institute for the Region. The report (with the eyes-glazing-over-as-we-read title “Trends in New Jersey Migration: Housing, Employment, and Taxation”) showed that the number of people earning more than $500,000 a year grew by 70% after the tax hike, resulting in an additional billion dollars a year in revenue for Trenton.

McMahon, on the other hand, notes:

“The Garden State has become one of the nation’s worst economic and fiscal basket cases. For tax years 2004-2006, the first three years after New Jersey raised its top rate, its population of high-income filers (those earning over $200,000 in adjusted gross income) increased by 44 percent, compared to a national rate of 59 percent. New Jersey’s growth rate in high-income taxpayers ranked 47th out of 50 states during that period; only Ohio, Connecticut (which also raised its top rate) and Michigan were lower.

The point is well-taken and begs the question: What does the experience of the boom years 2004-2008 have to do with what might happen as we slide into a very deep recession? The fact is neither side knows because there is no relevant research to look at.

But you have to ask: If New Jersey’s total tax burden (including property and sales) is the highest in the nation at 11.8% and Connecticut’s is third-highest at 11.1%, are wealthy New Yorkers who currently live in the second most-taxed state at 11.7% really going to move across the river or the border to save what would amount to them as little more than a few pennies?

It seems very unlikely. In fact the US Census Bureau asked about moving in the 2000 Census and found that 78% of those who moved said they did so for either family or housing reasons. In fact housing was the primary reason for moving among the wealthiest and best educated.

Certainly even this research misses the incredible changes in technology that allow people to work from remote locations – Jackson, Wyoming has millionaires galore who work from their ski lodges via blackberry and computer.

But based on what we know now, if Albany were to institute a higher tax on the state’s wealthy, there is no reason to believe any substantial number of them would leave.

Finally it’s worth noting that the “millionaire’s tax” has recently be redefined as a “quarter-millionaire’s tax” with the Fair Share Tax plan being promoted. The arguments being made are still the same, even if the number of people effected is much, much larger.

Now you know.