By Rick Manning
Millionaire taxes don’t work. State or local taxes aimed at the wealthy merely drive a jurisdiction’s tax base away.
The latest example of someone who is successful who would be better off living elsewhere is professional golfer Phil Mickelson.
Mickelson made a dream come true by winning the British Open and the $1.4 million that goes with it, but perhaps no one was more excited than California Governor Jerry Brown. With a state income tax of 13.3 percent for every dollar earned above two million, Mickelson’s win amounted to a $186,000 windfall for the formerly Golden State.
At the beginning of this golf season, Mickelson, who resides in the San Diego area, publicly mused about the tax rates, and how he might have to reevaluate where he lives. With both Texas and Florida having zero income tax, the choice to stay in San Diego cost him and his family’s pocketbook dearly. In fact, for the amount he chose to give the state of California from just this one victory, Mickelson could send a child through a mid-priced private university and still have money left over to provide $10k in pocket change.
It is reasonable to assume that the affable lefthander has an army of accountants working to legally shave his state and federal tax obligations, and one has to guess that they have worked up the numbers showing how much his stubborn insistence on living on the left coast is costing him.
While Mickelson has chosen to stay in a high tax state, other individuals are making the more financially prudent decision to relocate to a more tax friendly state.
The Wall Street Journal reported in 2009, that the state of Maryland lost one third of their millionaire taxpayers after Governor Martin O’Malley and the heavy Democratic majority in the legislature imposed a millionaire’s tax in the hopes of generating revenues from high end earners.
As a result, instead of gaining a projected $106 million in new revenues from the high end tax targets, the state collected $100 million fewer dollars from the wealthy. Not exactly the outcome Maryland lawmakers were hoping to achieve.
A CNBC report on a study conducted by Change Maryland found that between 2007 and 2010 when the millionaire’s tax was in effect, the higher tax rate cost Maryland $1.7 billion in lost tax revenues.
Change Maryland is a pro-growth group that sprung up to oppose tax and spending policies in the state that were destroying economic opportunity, and its founder, Larry Hogan, had no trouble pinpointing why the state’s revenues took a hit by the targeted tax saying, “Maryland has reached the point of diminishing returns. We’re taxing people too much and people are voting with their feet.
He added, “Until we change our focus from tax increases to increasing the tax base, more people are simply going to leave, leading to a downward spiral of raising revenues on fewer citizens.”
On the other hand, Texas Governor Rick Perry has spent the past six months aggressively recruiting businesses and their owners to relocate using the state’s zero income tax as a lure. While it is too early to tell whether Perry’s pitch caused a reverse dust bowl migration, it is clear that high state income taxes are on the minds of high income earners in states like California.
The San Jose Mercury News quotes Daniel Morris, senior partner at Morris & D’Angelo located in the heart of the Silicon Valley as saying that wealthy people in California are always thinking about whether their tax burden is too high.
“There will be wealth that leaves California,” Morris said. “Not everyone will move, but those who can, will.”
And if Mickelson looks for tax advice on the links, he only has to ask rival Tiger Woods, a fellow native Californian who told the Los Angeles Times, “Well, I moved out of here back in ’96 for that reason.”
Woods now lives in Florida, another zero income tax state, and it is safe to say that Woods is not alone in making this prudent financial decision.
In an investment world where averaging seven percent a year is considered a good return, high income earners in California gain about a nine percent return (after federal deductions for state taxes paid are calculated) on their money simply by abandoning California for a zero income tax state like Florida, Texas or Nevada.
When looked at rationally, it is a wonder that any high earners still live in the state at all.
Rick Manning (@rmanning957) is a native Californian living in Chesapeake Beach, Maryland. He is the Vice President of Public Policy and Communications of Americans for Limited Government.
