High Tax States Losing the Rich

With Obama's class warfare rhetoric at a fever pitch, some states are starting to take their ques to hike taxes on their wealthiest and most productive citizens. Arthur Laffer and Stephen Moore explain in the WSJ why "soaking the rich" does not work because the wealthy are either leaving high tax states or simply reducing their incomes to move into lower brackets.

Updating some research from Richard Vedder of Ohio University, we found that from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.

Did the greater prosperity in low-tax states happen by chance? Is it coincidence that the two highest tax-rate states in the nation, California and New York, have the biggest fiscal holes to repair? No. Dozens of academic studies -- old and new -- have found clear and irrefutable statistical evidence that high state and local taxes repel jobs and businesses.

Finally, there is the issue of whether high-income people move away from states that have high income-tax rates. Examining IRS tax return data by state, E.J. McMahon, a fiscal expert at the Manhattan Institute, measured the impact of large income-tax rate increases on the rich ($200,000 income or more) in Connecticut, which raised its tax rate in 2003 to 5% from 4.5%; in New Jersey, which raised its rate in 2004 to 8.97% from 6.35%; and in New York, which raised its tax rate in 2003 to 7.7% from 6.85%. Over the period 2002-2005, in each of these states the "soak the rich" tax hike was followed by a significant reduction in the number of rich people paying taxes in these states relative to the national average. Amazingly, these three states ranked 46th, 49th and 50th among all states in the percentage increase in wealthy tax filers in the years after they tried to soak the rich.

It sounds like a great idea to politicians in California, New York, Ohio, and Rhode Island - dictate a higher rate on a small percentage of the population that doesn't have the numbers to repel the idea. Who wouldn't love the idea of forcing someone else to pay more taxes? Unfortunately, these states are going to be left looking like today's European states - with huge social welfare programs and no one left to pay for them. Meanwhile, those businesses that used to be large employers will have left for Texas or some other tax-friendly state.