Taxes and Interstate Migration New Jersey Department of the Treasury Office of the Chief Economist Office of Revenue and Economic Analysis

The New Jersey Tax Flight Controversy In 2004 New Jersey sharply increased its highest tax rates: – Marginal rate on income over $500,000 was boosted from 6.37% to 8.97%. Hughes and Seneca (2007) first documented increased outmigration from New Jersey. Havens (2010) documented large unfavorable shift in wealth movements from New Jersey than from neighboring states. Young and Varner (2011) document outmigration rise at upper end, but – Regard loss of tax base as very small relative to revenue gain – Argue that tax increase had little or nothing to do with outmigration Assert high home prices in New Jersey may have spurred outmigration of the well-to-do. 2

Net Migration from New Jersey 3

Taking another look at the issue Young and Varner ▫Only considered taxes and outmigration, not taxes and inmigration. ▫Only looked at New Jersey ▫Did not systematically look at the influence of housing costs 4

Study of Interstate Migration Started with the IRS migration dataset. This series presents annual state-to-state movements of taxpayers and adjusted gross income. Assumed migrations are influenced by Differences in unemployment rates (people likely move from high-unemployment rate to low- unemployment rate states) Differences in home prices (people likely move from high-home price to low home-price states) Differences in state income taxes (people likely move from high-tax to low-tax states, especially to those with no state income tax) 5

Results Statistically significant effects of income tax rate differentials on annual migration. Housing price differentials also usually significant. People are attracted to zero income-tax states. 6

Implication of Results for New Jersey Suppose NJ boosted its income tax schedule by one percentage point across the board (and no other state changes its taxes). – This would be a very large tax hike More than twice as big as the 2004 increase. Static revenue increase would be nearly $2 ½ billion a year. – Model suggests NJ would see increased annual net outflows of About 4,200 taxpayers (likely about twice as many persons) About $530 million in AGI Average income of affected taxpayers equal to about $125,000. Similar calculations can be made for any other state. 7

Calculated Effects of 2004 “Millionaires’ tax” If NJ effective rates had remained at 2003 levels (movement since reflects bracket creep as well as changes in the law), then by 2009 ▫NJ would have had roughly 20,000 more taxpayers. ▫Adjusted gross income would be approximately $2.4 billion higher, generating more than $125 million in state income tax.  Suggests that revenue boost from 2004 increase has been partly reversed by induced out-migration of the base (as well as lessened in-migration). 8

Some Limitations of the Results Model does not estimate migration effects on ▫Business tax revenue ▫Property tax revenue ▫Sales tax revenue The cumulative tax losses to the state could potentially be larger than the model’s predictions 9

Effect of House Prices A $10,000 increase in New Jersey home prices would be associated with a loss of 1200 taxpayers a year and $66 million in adjusted gross income. ▫Average income of lost taxpayers is smaller than those affected by a rate increase (about $50,000 a year vs. about $125,000 a year). 10

Survey Evidence In July 2011 subscribers to the NJ Division of Taxation’s Tax E- Notes were asked about migration patterns. ▫Most likely, these are accountants or other financial advisers. Approximately 200 responded. ▫More than half said that clients had recently left, or expressed interest in leaving the state. ▫Given the option to pick 5 out of a list of 11 potential reasons for outmigration, the top ones were  State income taxes (85.4%)  State property taxes (77.7%)  State estate taxes (67.0%)  Retirement (47.6%)  Housing costs (43.7%) 11

Survey Question 12

Conclusions Analysis of IRS data suggests some connection between interstate tax differentials and migration patterns. ▫High taxes seem to be associated with loss of higher-income taxpayers. ▫High home prices seem to be associated with loss of middle- income taxpayers. Application to New Jersey suggests cumulative outmigration may have offset some portion of the 2004 tax increase. ▫Given New York’s 2012 reduction in income taxes, sensible to be aware of the potential impact of New Jersey taxes on migration.  Survey responses suggest that New Jersey’s taxes may be on many people’s minds when making location decisions. 13