Getting the CA, NJ perspective on millionaire tax
Taxing highest incomes to make public investments works
AS MASSACHUSETTS VOTERS weigh a ballot initiative to raise the tax rate on personal income over $1 million, the experience of other states can provide important insights about the likely impact. Consider our two states. New Jersey’s top tax rate on very high incomes is currently about 9 percent, the rate proposed in Massachusetts. California’s top tax rate reaches 13 percent. Our states offer real-world case studies rather than speculation.
While our state economies differ in some basic ways, the people in each have reached similar conclusions about the value of taxing the highest incomes to make important public investments that improve our schools, economies, and quality of life: it works. We heard many of the same arguments that are now being made against the proposal in Massachusetts to raise taxes on incomes over a million dollars in order to invest in education and transportation, and our experience with similar taxes has proven to us – and the people of our states – that those claims don’t hold up. The new revenue has helped improve our states’ economies by supporting vital investments in education and infrastructure. And rather than suffer from millionaire migration, our states have grown million-dollar earners at a healthy rate — in fact at greater rates than many low- or no-tax states.
Since raising its top marginal tax rate to above 12 percent in 2012, California’s economy has soared. Unemployment has fallen by more than half, from 11 percent in 2012 to 4.3 percent today. Incomes across the board have risen at a rate faster than the national average. We’ve gone from a $27 billion state budget deficit to deciding how a $8 billion surplus should be divided between new investments in vital public supports, building up the rainy day fund, and paying down debt. When California voters were asked in 2016 to extend the tax increase, the margin of support was even larger than the first time. The lesson in California is clearly that tax fairness and public investment are good for economic growth and the fiscal health of our state.
Although opponents point to New Jersey, with a top marginal rate of 8.97 percent, as a cautionary tale on taxing high earners, the state has actually grown the number of million-dollar incomes between 2010 and 2015. New Jersey’s total adjusted gross income increased by $37.6 billion between 2004 (when we implemented the rate) to 2015, after adjusting for inflation. Former governor Chris Christie repeatedly vetoed efforts to raise additional taxes on millionaires to make important investments in New Jersey’s future on his way to becoming the least popular governor in America and the least popular in the state’s history.
It’s important to separate fact from fiction about people with annual incomes over a million dollars. Research by Stanford University scholars Charles Varner and Cristobal Young shows that million-dollar earners actually migrate less often than other people, in part, as Young says, because they become “embedded” through business and personal connections. Working with US Treasury economists and analyzing 13 years of tax-return data for every single tax filer in the country who had a million-dollar income, Varner and Young concluded that millionaire tax flight occurs “only at the margins of statistical and socioeconomic significance.”
Similarly, our states’ experience strongly suggests that people with million-dollar incomes won’t leave Massachusetts from tax considerations in any significant number. Rather, the greater budgetary commitment to education and transportation will help provide the foundation to grow incomes at every segment, including the highest level.
Strong state economies generate home-grown growth in earnings across the income ladder. That’s why the states across the US with the highest top tax rates have seen growth in the number of million-dollar incomes that’s at least as strong as in other states. In fact, four of the top seven states with the steepest increases in their share of millionaires had top income tax rates on par with or greater than proposed in Massachusetts.The biggest economic risk for any state is failing to make the necessary investments in the future. As our experience attests, a Massachusetts tax on the very highest incomes will help ensure investments are made in education and transportation that lay the groundwork for broad-based prosperity.
Chris Hoene is executive director of the California Budget and Policy Center and Gordon MacInnes is president of New Jersey Policy Perspective.