May 27th, 2009

The missing millionaires: Laffer may have been right—and Maryland isn’t laughing

It turns out that, according to this WSJ article, Laffer may have been correct when he said a state that raises taxes on the rich often finds it has fewer revenues rather than more, because the rich have their methods of getting around that.

The state of Maryland has discovered that its nifty idea of making up for a shortfall by raising taxes on millionaires didn’t quite pan out as planned:

One year later, nobody’s grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller’s office concedes is a “substantial decline.” On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year — even at higher rates.

No one yet knows exactly what happened. Some of these millionaires may simply have lost a lot of money in the recession. But, as the WSJ article points out, that’s something states must factor in when they rely on sticking it to the rich when things are good; they might find an unexpected deficit when times get bad:

Progressive tax rates create mountains of cash during good times that vanish during recessions. For evidence, consult California, New York and New Jersey.

Of course, it’s possible that the state would have lost even more money without the tax hike. One way to test this would be to compare the missing millionaire mass of a state such as Maryland (one that recently raised the taxes on millionaires) to another state that failed to do so, and see if the percentages of lost millionaires are similar or different. My guess is that Maryland’s loss would be significantly higher—anyone out there want to take up the challenge of doing the research?

There’s little question that at least some of those Maryland millionaires probably took up legal residence in more tax-friendly states, although the exact number of refugees is unknown. Another part of the loss may be accounted for by more tax evasion and even outright fraud, although the extent of that would be extraordinarily difficult to estimate as well. But millionaires don’t usually get to be millionaires by being dumb about making and keeping money.

7 Responses to “The missing millionaires: Laffer may have been right—and Maryland isn’t laughing”

  1. Webutante Says:

    S money isn’t called “smart money” for nothing. And Maryland shouldn’t wonder what happened if it studied ever a modicum of history.

    A brief and well worth walk down memory lane tells us:

    But don’t believe me or even history; just watch what happens to state and federal government as they raise taxes and it’s not going to be pretty.

  2. jon baker Says:

    Rush Limbaugh recently made a big deal about closing the last part of his operation in New York because of tax hikes.

  3. Assistant Village Idiot Says:

    You are a wealthy person, who has a second home or branch office in another state. How hard is it to change your legal residence from one to the other?

  4. JKB Says:

    How hard is it to change your legal residence from one to the other?

    Generally, you just have to reside out of the state for a majority period of time during the tax year. I would expect the way to test this is to see about attendance at millionaire events like cultural season openings, charity events, etc.

  5. I R A Darth Aggie Says:

    Rush Limbaugh recently made a big deal about closing the last part of his operation in New York because of tax hikes.

    That, and he pretty much got audited every year…

  6. Webutante Says:

    Actually, I’ve changed my residency from one state to another twice in the past 20 years and here’s what I would advise:

    1) Have a physical address in the new state, and an actual residence; 2) be able to prove you spend more than 50% of your time in the new place; 3) get a driver’s license in the new state and give up the one in the old; 4) register to vote at your new address; and 5) begin to pay state income taxes or abide by whatever the state laws are (for instance in Tennessee there’s no income tax on earned income—just unearned income) on the next April 15.

    Going to “millionaire openings” and cultural events would not get it with the accountants and tax people I know, especially in a court of law.

  7. Marcelo Vissering Says:

    Hey I came across your site by luck on bing while trying to find something totally irrelevant but I am really happy that I did, You have just added yourself another subscriber. 🙂

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Previously a lifelong Democrat, born in New York and living in New England, surrounded by liberals on all sides, I've found myself slowly but surely leaving the fold and becoming that dread thing: a neocon.

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