Maryland Residents Stayed After Tax Increase: Common myth is busted

The challenges we face in ensuring adequate funding for public education are intimately related to public policy on taxation. More and more people are discussing the pros and cons of a millionaires tax: to increase the progressivity of Maryland's income tax. Currently, virtually all tax payers pay the same income tax rate.

A recent noteworthy posting from the Maryland Budget and Tax Policy Institute highlighted a new report that analyzed the impact of income tax increases on high income earners. Many opponents of a millionaires tax in Maryland argue that it will drive high income earners out of the state. But the facts don't bear that out.  This new study, conducted by the reputable national Center on Budget and Policy Priorities concluded that "The effects of tax increases on migration are, at most, small — so small that states that raise income taxes on the most affluent households can be assured of a substantial net gain in revenue."

The study included a specific examination of data on the recent increase in Maryland's top income tax rates, and found little evidence that it caused "flight" by high income earners. The posting from the Maryland Budget and Tax Policy Institute is reprinted below:

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Raising state taxes on the rich does not cause them to leave and results in substantial new revenue, according to a new report that examined the experiences of Maryland and other states following tax increases for earnings at very high income levels. The report busts a common myth advanced by opponents of Maryland’s 2008 tax increase, which raised much-needed resources to support vital services.

Opponents of Maryland’s 2008 tax increase on income over $1 million point to the sharp decline that year in the number of filers with taxable incomes exceeding that amount as evidence that wealthy residents were fleeing the state. But the report’s examination of actual tax return data shows that the vast majority of this decline occurred not because people moved out of the state, but because their incomes fell below the $1 million mark due to the recession and stock market crash; they remained on the tax rolls, but in a lower tax bracket.

Attacks on sorely-needed increases in state tax revenues often include the unproven claim that tax hikes will drive large numbers of households — particularly the most affluent — to other states.

This claim is false. 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.

Cheaper housing, the availability of jobs and a variety of other factors influence Americans to move from state to state, but tax levels rarely factor into such decisions.

The report cites numerous other examples of research debunking the migration myth and, through case studies, shows how misinformation about the impact of taxes on migration can influence policymakers and the media. Those who support the migration myth often wrongly assume a cause and effect relationship, promote irrelevant findings, and inaccurately measure migration, the report found.

Specifically, the report illustrates that housing costs may have a significantly larger impact on Americans’ finances than tax levels.

The Center on Budget and Policy Priorities, a Washington, DC-based nonpartisan, nonprofit policy research organization published the report. View the full report.