Tax flight: Myth versus reality

Anti-taxers say the fair tax will prompt rich residents to flee state, but two studies find that prediction patently unfair

Will wealthy Illinois residents flee to other states with an increase in their taxes? Studies find they’re actually embedded in the areas where they amassed their wealth. (Shutterstock)

By Ted Cox

The forces opposed to any and all taxes are fighting the fair tax advocated by Gov. Pritzker by charging that it will prompt wealthy Illinoisans to flee to other states. But statistical evidence suggests those well-to-do residents are actually embedded in the communities where they amassed their wealth, and that it’s low-income residents bridling under the state’s regressive flat income tax that are more likely to leave for greener pastures.

In short, back that argument up before it carries you off to fantasyland — or to Indiana, whichever is worse.

It’s commonly said, and widely repeated, that Pritzker’s proposal for a graduated income tax — in which tax rates are raised only for the top 3 percent of wage earners making more than $250,000 — would actually prompt those high-salaried residents to move to other states. But two studies drawing extensively on federal tax data debunk that notion, with one finding that “elites are embedded in the regions where they achieve success, and they have limited interest in moving to procure tax advantages.”

The first study is actually not new. The American Sociological Association published a study on “Millionaire Migration and the Taxation of the Elite: Evidence From Administrative Data” in its review periodical in 2016. But it draws extensively on 13 years of tax data from returns filed by million-dollar earners across the nation — 45 million returns — while “tracking the states from which millionaires file their taxes.”

It’s prescient about the current tax debate, too, starting out: “A growing number of U.S. states have adopted ‘millionaire taxes’ on top income earners. This increases the progressivity of state tax systems, but it raises concerns about tax flight: elites migrating from high-tax to low-tax states, draining state revenues, and undermining redistributive social policies.

“Are top income earners ‘transitory millionaires’ searching for lower-tax places to live? Or are they ‘embedded elites’ who are reluctant to migrate away from places where they have been highly successful?” Over 13 years, a trend indicating “tax flight” for those with the resources to move should be clear in a state-by-state breakdown. Yet the study finds “that millionaire tax flight is occurring, but only at the margins of statistical and socioeconomic significance.”

Retirees with the means to move to Florida frequently move to Florida, no doubt about it. But that’s true for almost every state, and especially true for states that have winters with foot-or-more snowfalls and subzero temperatures.

The ASA study echoes that. “We find that millionaire migration is indeed responsive to top income-tax rates,” it states. “However, the magnitude of the migration response is small and has little effect on the millionaire tax base. … Moreover, evidence for tax flight rests entirely on high migration rates into Florida, and not to any other low-tax state.”

The study even examines whether some million-dollar earners stay close to home by simply jumping across state lines, but again without finding any proof. “When we focus on states’ border regions,” it says, “we do not find compelling evidence that millionaires cluster on the low-tax side of state borders. Elites are embedded in the regions where they achieve success, and they have limited interest in moving to procure tax advantages.”

All this is backed up by a more recent Bloomberg Opinion piece published just this month by Justin Fox. Jumping off from an Empire Center for Public Policy study on migration from New York State, he again uses federal tax data to extend the same research to Illinois and California — the other two states, along with New York, that have lost the most residents to migration over the last decade.

“New York, California, and Illinois have been hemorrhaging residents,” Fox writes. “Almost 3.2 million more people left those states for elsewhere in the U.S. than arrived from other states, from 2010 through 2019.” But California recorded 2 million more births than deaths over the time span, while adding 1 million other residents, to increase population, and New York also grew if at a slower overall rate, while Illinois — as we all know from the latest U.S. Census Bureau figures — lost 160,000 from the last Census in 2010.

The question is, where were those people going, and were they spurred by high taxes?

They were primarily going to Florida and Texas, which Fox notes are “the top two destinations for Illinois migrants (and) the top two for the nation as a whole,” again led by those retirees in search of warm weather.

Fox cites Internal Revenue Service data showing that more than 75,000 Illinoisans left for Florida, with an average income of $135,000, demonstrating, as everyone already knows, that it takes money to move someplace warm and comfortable. Some 70,000 left for Texas, with an average income of $76,000, indicating much the same. But the third most likely place for Illinoisans to move was Indiana, and the average income of those people was $53,000. The only state to attract Illinoisans with a lower average salary was, not coincidentally, Missouri, at $52,000.

State Rep. Will Guzzardi and state Sen. Chuck Weaver debate the fair tax last year. (One Illinois/Ted Cox)

By the way, the fourth most popular state for Illinoisans to move to was none other than high-tax California, drawing 43,000 new residents from our state. So there goes the notion of people choosing their residence according to their tax returns.

Fox notes: “California, Illinois, and New York have all experienced bigger per capita personal income gains than the nation as a whole since the beginning of 2010, and all saw taxpayers with incomes below $50,000 overrepresented among the leavers from 2011 through 2018. These departures may indicate failures of governance as well, but it’s a different set of governance failures, presumably related more to housing costs, commutes, and job opportunities than taxes per se.”

In other words, under the state’s regressive flat income tax it’s poorer Illinoisans, not the rich, who are more likely to move. That’s borne out by a Better Government Association study from last year which found that the last time Illinois raised its flat income tax, from 3 to 5 percent in 2011, it was the rich who stayed and prospered while low-income workers fled. That clearly suggests that, with everyone paying the same tax rate, low-income Illinoisans felt that increase far more than well-off residents did, and were more likely to actively seek relief if they could.

A progressive income tax might actually provide that relief to Illinoisans without anyone having to move.

State Rep. Will Guzzardi of Chicago and state Sen. Chuck Weaver of North Peoria sparred over the fair tax in a debate at the City Club of Chicago last year, with Weaver insisting the rich would inevitably leave the state.

“That’s just not true,” Guzzardi responded. “I’m sorry,” and he cited how Minnesota hiked its top tax rate on its wealthiest citizens, yet saw the number of taxpayers earning $200,000 or more rise 28 percent from 2013 to 2016.

Similarly, conservative 560-AM radio pundit Dan Proft trotted out the argument that the rich would flee Illinois in a debate on the fair tax back in November. But Ralph Martire, executive director of the Center for Tax and Budget Accountability, countered that, while Illinois was indeed suffering from a net migration loss, with more people leaving than moving in, Wisconsin and Iowa both actually lose a higher percentage of their populations to Illinois than vice versa, and specifically to Chicago, Cook County, and the collar counties — where taxes are highest in the state. He argued that tax policy has little if any effect on where people choose to live.

If only that were the last word on the subject before voters go to the polls in November for a referendum in which a 60 percent supermajority is necessary to amend the state constitution and adopt the fair tax. But, valid or not, anti-taxers are sure to keep threatening that the rich will leave Illinois as a consequence. That’s one argument you wish would go away and never does.