Maybe states need not rush quite so fast in the ever-famous race to the bottom.
Being forced to pay higher state taxes doesn't appear enough of an incentive to get the rich to up and leave town, according to a new paper by Jeffrey Thompson, an economist at the University of Massachusetts at Amherst's Political Economy Research Institute. That's because moving is expensive, wealthy people usually have roots in their communities and they often value the public services that they get by paying higher taxes. Thompson cites several recent research studies, including his own, to make his case.
The report will likely come as a relief to states that are coping with budget shortfalls in an anemic economic recovery. State tax revenue has dropped with so many Americans having lost their jobs or taken pay cuts. As a result, even after slashing their budgets, states will face budget gaps totaling $49 billion next year, according to the Center on Budget and Policy Priorities.
How to tax the rich at the federal level has become a hotly contested issue since President Obama recently proposed raising taxes on millionaires, who sometimes pay taxes at a significantly lower rate than middle class earners. The initiative, if enacted, would raise $47 billion in revenue for the federal government, according to a congressional report.
Thompson cited a slew of studies showing that tax changes don't make rich people leave their states. New Jersey's 2004 "millionaire tax" did not make wealthy households more likely to leave the state, according to a 2011 paper by Cristobal Young, a Stanford sociology professor, and Charles Varner, a doctoral sociology student at Princeton.
State tax increases also have very little impact on workers' decision to move, and the highest-income workers are among the least likely to move because of tax increases, according to a 2011 paper by Thompson.
But even those who aren't attached to a state due to a job are still unlikely to move. More than half of Americans have never lived in a state different from the one they now call home, according to a Pew Research Center study cited by Thompson.