The Institute's Staff

More Tax-Flight Talk without Evidence

There is still no evidence that millionaires are fleeing Maryland in significant numbers to avoid state income taxes.

There is considerable evidence that the vast majority of Marylanders who make $1 million or more a year are staying put – paying their fair share to help the state invest in future prosperity.

Some commentators and politicians thought they saw something to buttress their millionaire-exodus claims in data released recently by the state Comptroller. Let’s look at what that was. The Comptroller’s office, in a November 23 letter to two legislators, noted that 542 taxpayers of the 7,067 that reported at least $1 million in taxable income in 2007 did not file Maryland income tax returns in 2008.

That’s it? That’s the proof? The Comptroller himself warns against jumping to the millionaires-fleeing-Maryland conclusion. In the letter he wrote, “There are several reasons a return may not be filed in following years including, among others, leaving the State, death of the taxpayer, and simply not filing a return or filing a delinquent return. We cannot readily determine the reason a return is not filed and, even if we know a taxpayer has left the State, we cannot determine why.”

Over the past seven years, between 5 percent and 6 percent of the state’s millionaires drop off the rolls each year. The average was 5.7 percent. Last year’s drop-off was 7.7 percent. That comes to about 140 more than the normal amount.  At most, one out of every 50 millionaires might, possibly, have left the state because of the tax changes. Of course, those who stayed far, far outweighed those who might have left.

What about the 30 percent drop in millionaires cited in media stories? There were 30 percent fewer million-dollar-plus tax returns filed in 2008 compared with 2007:  7,067 in ’07 to 4,910 in ’08. Here again some claim it means millionaires left Maryland because of the tax increase. And here again, the evidence says otherwise. Almost certainly, these taxpayers suffered so much in the poor economy that their income declined from over $1 million to under $1 million. That also happens every year. The Comptroller reported that over the past seven years, between 31 percent and 52 percent of millionaires failed to repeat. In 2008 reductions in investment income, business income and real estate proceeds very likely brought several hundred former millionaires under the million-dollar level in 2008. A 30 percent drop this year isn’t exceptional. In fact it’s a trend seen nationwide.

Maryland’s Tax Changes

Let’s review the facts about Maryland’s ‘millionaire tax.”  Before 2008, Maryland’s state income tax essentially charged everyone the same rate: 4.75 percent.  Households with incomes over $1 million paid the same tax rate as families that earned less than $100,000. In 2007 and 2008, the legislature made changes in the income tax to base it more on ability to pay and bring in more revenue to meet public needs.

The result today is that Maryland couples pay 4.75 percent percent tax on most income up to $200,000. They pay 5 percent on income between $200,000 and $350,000; 5.25 percent on income between $350,000 and $500,000; 5.5 percent on income between $500,000 and $1 million; and 6.25 percent on income above $1 million is not taxes at 6.25 percent. Keep in mind the rates only affect those specified income levels – so someone making over $1 million doesn’t pay 6.25 percent on all their income, only on the portion exceeding $1 million.

In other words, the wealthiest are being called upon to pay 1.5 cents per dollar more than before on that part of their income that is over $1 million. 

At the same time, the legislature also made some changes to reduce taxes for low-income and middle-income working people The Refundable Earned Income Tax Credit was expanded.  This program helps low-income, working taxpayers.  This change would be worth about $200 to a family of four with poverty-level income. Personal exemptions were increased by $800 for all but upper-level taxpayers, meaning a middle-income family of four saved as much as $152 each year.

Research Confirms Soundness of Maryland Policy

What has happened in other states? Last year, a Princeton University study on the impact of a New Jersey tax increase on incomes over $500,000 found little impact on migration. Researchers concluded that New Jersey did indeed lose $37.7 million a year from people leaving the state because of the 2004 tax increase. But they called it “a small opportunity cost of a tax policy that generated more than $1 billion for Tax Year 2006.” The study also found that, from 2002 to 2006, the number of New Jersey households with incomes over $500,000 grew by 70 percent.

Similarly, the California Budget Project found the number of high-income households in that state grew substantially when higher top income tax rates were in effect. According to CBP, “the number of California’s joint personal income tax filers with incomes of $200,000 or more rose by 33.4 percent between 1991 and 1995 — a period in which California temporarily imposed 10 percent and 11 percent tax rates on high income earners.” More recently, California enacted a 1 percentage point increase on income over $1 million and the number of taxpayers making over $1 million increased — by 37.8 percent from 2004 to 2006.

Conclusion

When you add it all up, the bottom line is that nearly 5000 millionaires managed to stay in Maryland and pay their fair share for state and local services. Figure in sales tax and property tax, and the millionaires still paid a smaller share of their incomes than other Marylanders. The 80 percent that make under $103,000 paid about 10.4 percent of their income in state and local taxes.  Those in the top 1 percent (with an average income of $1.8 million) paid about 8 percent. The money goes mostly to fund investments in education, healthcare, transportation, police and corrections, and maintaining a basic social safety net in our communities.

Because the state and local governments are required to balance their budgets, without this funding there would be greater cuts in all those areas and a resulting decline in opportunity. 

Maryland’s future economic health depends in large part on the skills of its workforce and the quality of life Maryland offers to families and businesses. Progress in those areas requires the strong cooperative efforts of the private, not-for-profit and government sectors – as well as a fair and adequate tax system. Let’s not retreat from that commitment based on unlikely theories and misinterpreted data.

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