How Does The High Income Tax Strategy Play Out?

At Forbes Magazine a guy named Rex Sinquefield writes from time to time about the counterproductive tax strategies followed in recent years by the state of Connecticut.  A friend in that state sent me a link to Mr. Sinquefield's latest contribution, from May 23.  The article is titled "25 Years, $13 Billion Lost: Connecticut Income Tax Continues To Fail."  

I previously linked here to a post about a year ago by Mr. Sinquefield that focused on the big round of individual and corporate tax increases enacted by Connecticut in 2015.  Those increases included a permanent extension of a 20% corporate income tax surcharge, which led several large corporations with headquarters in Connecticut to threaten to leave.  Subsequently, in January 2016, the very largest Connecticut-headquartered company, General Electric, followed through and announced it will move its headquarters to Boston.  (Wow!  You really know that you've reached the top of the tax pyramid when companies leave your state to save taxes by going to Massachusetts!)  The 2015 increases also got Connecticut's top personal income tax rate up to 6.9% (on income above $250,000), which puts the top Connecticut rate above New York (outside NYC) for incomes under $1,070,350, and above New Jersey for incomes between $200,000 and $500,000.

Somehow the people of Connecticut failed to notice that they got rich precisely by being a haven of low taxes.  Prior to 1992 Connecticut had no income tax at all.  High income people flooded into the state, but not into the whole state.  Overwhelmingly the wealth was concentrated in that tiny panhandle that sticks out in the southwest corner of the state, toward New York City.  The panhandle contains four towns -- Greenwich, Stamford, Darien and New Canaan -- sometimes known as Connecticut's "gold coast."   To anyone who looked, it was obvious that the business model of those towns in their heyday was for their citizens to be able to deal with the New York business community without having to pay New York taxes.  Anyway, that was then.  Today, Connecticut has frittered away essentially all of its former tax advantage over New York and New Jersey, and is well above Massachusetts in overall tax burden.  The office building boom in downtown Stamford gradually came to a halt.

And what has happened to the location decisions of wealthy individuals?  That brings us to Mr. Sinquefield's latest article, where he focuses on data available from the IRS, and compiled by the Yankee Institute in Hartford, that reveal net migration of income earners between any two paired states.  The results should not surprise anyone:

Between 1992 and 2014 (the most recent year for which Internal Revenue Service taxpayer data is available), Connecticut lost $12.36 billion in net adjusted gross income (AGI). Perhaps not surprisingly, the bulk of this outwardly migrating AGI went to states that do not punish work by levying an income tax. The state of Florida won the lion’s share of Connecticut’s fleeing AGI, with $7.96 billion leaving the Nutmeg State for the Sunshine State.  

Florida, of course, has no income tax at all.  The $12.36 billion, by the way, is an annual amount, meaning that, on net, individuals who have migrated out of Connecticut since 1992 have annual income $12.36 billion higher than the annual incomes of those who have migrated in.  Moreover, the number has grown every year, and has accelerated in recent years.  For example, from 2006 to 2011 the figure crept up from about $6 billion to $7 billion; but then there was a prior big round of tax increases in 2011, and the figure shot up to about $9 billion in 2012 and $11 billion in 2013.  In a process that has now continued over 25 years, the income tax has transformed Connecticut's economy from tax-haven boom to high-tax stasis.

The funny thing is, somehow the income tax and its big gusher of state revenue has not solved Connecticut's problem of persistent annual budget crises.  The income tax -- initially a flat 1.5% -- was sold as the ultimate one-time fix that would end Connecticut's budget problems for all time.  Today, with the rate more than four times higher, the budget problems are the same.  All the money just disappeared down the maw of endemic overspending and seemingly far-off pension promises for public employees.  

Are there any lessons to be learned here for other states?  You might think so, but consider this article from James Nash of Bloomberg News on Monday, titled "States Eye Wallets Of Richest Residents With Income Tax Measures."   Nash discusses potential measures for the November ballot seeking to raise income taxes on high earners (or retain special high-earner tax rates otherwise scheduled to expire) in states including California, Colorado, Maine, Massachusetts and Minnesota.  Several of these are being sold as supposedly a special revenue stream to pay for a particular need.  For example, the Minnesota ballot initiative will supposedly provide money to "care for senior citizens and people with disabilities"; a Los Angeles County initiative will supposedly raise money to provide for "homeless services."

Nash quotes a guy named Morris Pearl, of something called Patriotic Millionaires, who believes that higher taxes on the wealthy few should be enacted because they are broadly popular:

"There is more action in the states because the federal government, particularly the Republicans in the House of Representatives, don’t really care what the people think," said Morris Pearl, a 56-year-old former managing director at Wall Street investment firm BlackRock Inc. who now heads the Patriotic Millionaires, a coalition of wealthy Americans advocating higher taxes on the rich. "In a lot of states, people are realizing that the wealthy are taking advantage of the system."   

Well, I can't say I'm surprised that a lot of people are in favor of higher taxes as long as they are to be paid by someone else.  But be careful what you wish for.  Remember that here in highest-in-the-nation tax-and-spend Manhattan we supposedly pay our highest-in-the-nation taxes to provide for a progressive utopia, but what we seem to have instead is highest-in-the-nation income inequality, well-above-average poverty rate, and schools that cost about double per student the national average for bottom-of-the-barrel results.  For that we put this huge drag on our economic performance?