The very rich aren’t likely to flee income-tax states

If Washington adopted an income tax, would our wealthiest residents flee the state?

I certainly heard that argument from some readers after my recent column about Washington’s heavy reliance on sales taxes, which hurts our poorest residents.

The idea is nothing new. In 2010, The Seattle Times editorial board expressed the same concern in opposing Initiative 1098, the ballot measure to tax the state’s highest earners (the initiative failed).

Intuitively it makes sense. We equate money with freedom and mobility, after all — so there’s nothing to stop the rich from simply picking up and moving.

Or is there?

A new study shows that the wealthiest Americans tend to stay put, regardless of their home state’s tax system. And when the rich do move, they are only slightly more likely than the general population to move from a high-tax state to a low-tax state.

Cristobal Young, an assistant professor of sociology at Stanford University, led the study, which analyzed data from every tax return of $1 million or more filed with the Internal Revenue Service between 1999 and 2011. This data enabled the research team to track the movement of million-dollar earners from state to state during this period.

The researchers also compared the migration patterns of these millionaires with the general population, using a 1 percent sample of tax returns. In total, 45 million records were examined.

And it turns out, the evidence that millionaire tax flight occurs at all rests almost entirely on migration into one state with no income tax.

It’s not Washington.

“What we see is a pattern from some high-tax states in the mid-Atlantic and Midwest into Florida,” Young told me. “One thing we’re left figuring out is how much of this is tax driven, and how much is driven by geography and climate of Florida … it’s a very attractive state to people from New York, New Jersey and Connecticut.”

Young points out that even the other low-tax states — including Washington — see millionaires leave for Florida.

The data reveal that Washington hasn’t benefited from an influx of millionaires from high-tax states. About the same number of millionaires move in as move out each year, according to Young.

On average, about 10,500 Washington households declared income of at least $1 million on federal tax returns between 1999 and 2011.

And when wealthy people leave Washington, they settle in a mix of places from across the tax spectrum. In fact, our largest migration “deficit” is with Arizona, which taxes millionaires at an effective rate of 4.6 percent. Washington’s 1 percenters, apparently, like sunshine more than they hate income tax.

You might think that Portland millionaires, burdened by Oregon’s high-tax regime, would simply move over to the Washington side of the Columbia River. But it hasn’t happened.

“There aren’t many rich people moving across the border (from Portland to Vancouver),” Young said. “There is millionaire migration from Oregon to Washington, but it’s mainly to Seattle.”

Although it may seem that the rich would be the most mobile segment of society, the study reveals they relocate less often than middle-class or poor folks.

Of the roughly 500,000 U.S. households that report income of $1 million or more each year, about 12,000 indicate a change of state. That equals a 2.4 percent migration rate, which is lower than the migration rate for all U.S. households of 2.9 percent.

The data show that millionaires are more likely to be married and to have children than the general population, factors that tend to keep people in place. Business ownership also is a strong embedding factor.

“You think about people making a million dollars a year in Washington — these are people at the very top of their game, late-career people,” Young said. “Moving doesn’t make sense for them — it’s difficult, and it isn’t something people usually enjoy doing. You see much higher migration among low-income people: For them, starting over in a new state is a new opportunity rather than a potential disruption.”

Still, it’s true that some millionaires would move if Washington imposed an income tax on them — and Young’s migration data enables him to predict the number who would leave.

If Washington were to tax its wealthiest residents’ income at a 1 percent rate, he said, we’d witness an exodus of 19 millionaires.