The Myth of Millionaire Tax Migration

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This man is dodging taxes AS WE SPEAK. Photo: Image Source/Corbis

Today's New York Times carries a curious story by Adam Nagourney about how millionaires in California, enraged about the recent tax hikes on high-earners in the state, are looking to move to Nevada and other states with lower taxes. Unfortunately, the Times can't find any actual tax-hating millionaires to interview, and makes do with rehashed quotes from golfer Phil Mickelson (who dialed his tax comments back two weeks ago) and a premise-undercutting interview with David Geffen, who says he's "happy to pay [his] taxes, whatever they are." That lack of solidity may be why Times editors changed the piece's headline from its original title — "Millionaires Consider Leaving California Over Taxes" — to the much more vague "Two-Tax Rise Tests Wealthy in California."

But fake-trend stories aside, Nagourney raises an interesting question: Do rich people really pack up and move to avoid taxes?

The threat of mass, tax-related migration has been used for years by anti-tax crusaders in relatively high-tax states like New York and New Jersey. And we know that corporations like Apple conduct massive tax arbitrage schemes, which save billions of dollars by forming shell corporations and redirecting profits to overseas entities. So it would seem logical, on the face of it, that everyday rich people in California would protest an oppressive tax regime by leaving the state.

Except that, as we've seen in all the previous tax flight discussions, individuals almost never move to avoid high taxes.

This 2011 study from the Center on Budget and Policy Priorities swings an ax at the myths surrounding tax flight. It found that, among other things, only 1.7 percent of Americans moved from one state to another in the decade between 2001 and 2010, and those who did move were often motivated more by cheap housing prices than lower tax rates. Drawing on a 2011 Stanford study, the authors also found that the percentage of rich people who move out-of-state after a tax hike is statistically insignificant — in 2004, for example, when New Jersey increased its tax rates on people who made more than $500,000 a year, no more than 70 people moved to take advantage of lower rates elsewhere, costing the state a not-exactly-whopping $16.4 million in tax revenue. And forget about middle-class tax arbitrage — in Florida, where there is no personal income tax at all, the authors found that the migration patterns mirrored the broader state economy and showed no response to tax changes.

Sure, there is the odd case of a wealthy tax-avoider who will go to extreme lengths. (Jim Stewart had a piece in The New Yorker last year about hedge-fund manager Julian Robertson and his cartoonishly complex plot to spend exactly 180 days a year in New York City in order to qualify as a non-resident for tax purposes.) And it could be that, as former Bloomberg spokesman Stu Loeser argued on Twitter today, there are a few people who live in New York but have summer homes in a lower-tax state, who wouldn't mind spending a few additional days a week at the beach in order to bring their rates down.

But the reason why we only hear about rich tax-fleers once in a while (Gérard Depardieu being the most recent example) is that they compose an infinitesimally small minority of the wealthy. The vast majority of people, especially rich people, tend to like where they live. They have strong ties to their communities. They sit on local boards. They enroll their kids in good schools. They have nice houses, well-landscaped yards, and friends in the neighborhood. For them, the costs of moving — both financial and emotional — tend to far outweigh the benefits of entering a friendlier tax regime, no matter how many tens of thousands of dollars those savings amount to.

In California, especially, where there are no easy border states to move to, and where lots of the wealth is being created in discrete geographical regions (Silicon Valley and L.A.), the hurdle to tax flight is especially high. It's possible to start a successful tech company in Las Vegas, if you're Tony Hsieh. You can also start an ice-fishing company in Florida. But for most people who make money in a location-based industry, there are vast financial incentives to staying put.

The line from opponents of high local taxes is always that they will deter people from starting businesses and making money in the region. But we've seen that that's not the case. California has had relatively high taxes compared to Nevada for years, and yet Silicon Valley remains the locus of innovation. Even a Californian I mocked in these very pages several months ago, Ethan Anderson, a wealthy tech entrepreneur who wrote a column complaining about Proposition 30 (which raised taxes on guys like him), has benefited from being close to his industry. Today, Anderson announced he got a big investment in his new company from a venture capital firm called GRP Partners. Which is also located in California.

All of this is to say that in California, as in New York and New Jersey, threats about millionaires leaving town because the government raises their taxes are exceedingly empty. We shouldn't take them seriously, no matter how many front-page Times stories these vaporous fulminations inspire.