Does State Taxation Cause the Wealthy to Move to Different States?
Episode 234 – States with high income and estate taxes may cause the wealthy to move to another state with one or the other, but not both taxes.
Transcript of Podcast Episode 234
Hello, this is Bill Rainaldi, with another edition of Security Mutual’s SML Planning Minute. In today’s episode, Does State Taxation Cause the Wealthy to Move to Different States?
The financial news company, Bloomberg, recently reported[i] on a study published in the May 2023 issue of the American Economic Journal: Economic Policy[ii], that revealed some interesting data on the cause and effect of taxes on the ultra-wealthy moving to different states. The study was conducted by Enrico Moretti, an economics professor at the University of California, Berkeley, and Daniel J. Wilson, an economist for the Federal Reserve Bank of San Francisco.
The study analyzed the behavior of hundreds of billionaires since 2001 and found that of the dozen states that had a state estate tax, over 21% of the billionaires moved to other states that did not have a state estate tax. The Bloomberg article noted: “States controlled by Democrats have been raising taxes on the wealthy, arguing that it spreads wealth and funds services like education that boost growth and innovation over the long term. Those run by Republicans have been cutting levies on the rich, betting that low rates can attract people, businesses and investment.”
Professor Moretti summed up the research by saying “You can either be progressive on income tax or be progressive on adopting an estate tax, but if you do both it’s going to backfire.” Washington state was cited as an example where there is no state income tax but has the highest state estate tax. Even if some billionaires left, revenues would be more than made up through the estate tax on the remaining wealthy. On the other hand, California is known to have many billionaires and it also has high income tax rate. However, California does not have an estate tax, and there has not been a significant exodus of billionaires from California. The study suggests imposing an estate tax would cause the ultra-wealthy to flee California. New York, which also has a high number of billionaires, is one of those states that has a high income tax rate, and also high state estate tax. Having both kinds of taxes appears to cause many of the super-rich to move to a different state that may have one, but not both of those types of taxes.
It is estimated that nearly 2,000 millionaires moved out of New York in 2020. An additional 1,453 millionaires moved out of New York in 2021[iii]. Many moved to New Jersey, which no longer has a state estate tax.
If you’re wealthy and live in a state that has high income taxes, as well as an estate tax, you may have already thought about relocating. If so, you’re not alone. Before you make any decisions, make sure you consult with your tax and legal advisors to determine if that is the right move for you.
[i] Steverman, Ben. “Taxing Wealthy Dynasties Seen Backfiring in States Like New York.” Bloomberg.com. https://www.bloomberg.com/news/articles/2023-05-03/tax-the-rich-targeting-billionaire-family-estates-seen-backfiring-in-new-york?leadSource=uverify%20wall (accessed May 3, 2023)
[ii] Moretti, Enrico, and Daniel J. Wilson. 2023. “Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy.” American Economic Journal: Economic Policy, 15 (2): 424-66
[iii] Barron, James. “Some Millionaires Moved Out, but There Are Still Plenty Left.” Nytimes.com https://www.nytimes.com/2023/02/23/nyregion/millionaires-new-york-taxes.html (accessed May 3, 2023)
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