State wealth tax compact is short on logic and high on ideology
Call them the “Spendthrift Seven.”
California , Connecticut, Hawaii, Illinois, Maryland, New York, and Washington, together accounting for most of the wealth in the nation, announced coordinated state wealth tax proposals on Thursday. Referring to the wealthy’s property, Maryland Del. Jheanelle K. Wilkins explained that there’s “quite a bit of funds that we’re leaving on the table.”
This interstate tax compact attempts to overcome one of the biggest problems with a wealth tax: the ability of those affected simply to move jurisdictions. One slight problem for the compact? There are still 43 other states that the wealthy in their states could move to.
A recent analysis by James Doti, president emeritus and economics professor at Chapman University, finds people are already moving from high-tax states into low-tax ones. He concludes the 10 highest tax states lost nearly 1 in 100 residents in net domestic migration between July 2021 and July 2022. He assesses that the 10 lowest tax states gained almost 1 in 100. Top line: Higher taxes only accelerate tax migration.
The top 1% of taxpayers already pay approximately 50% of state income taxes, so wealth taxes that chase them away could significantly imperil states’ fiscal positions. Low-tax states have gained tens of billions of dollars in gross income in recent years due to the relocation of the wealthy and upper-middle class, while high-tax states have lost a comparable amount. Think financiers moving from New York, New Jersey, and Connecticut to Florida, businessmen fleeing Illinois for Tennessee, and entrepreneurs decamping California for Nevada, Arizona, and Texas. What high-valuation/cash-poor startup would submit to a state wealth tax in this environment?
As Jared Walczak, a policy analyst at the Tax Foundation, explains, “The economic consequences — both from out-migration and lower economic activity — are so significant that even at the national level, most countries have abandoned any wealth taxes they once had.”
There’s an alternative approach. The Congressional Budget Office reported that the government collected a record $4.9 trillion in revenue last year, almost $500 billion more than it had projected. Corporate tax receipts, reduced corporate tax rates being the centerpiece of the Republican-led 2017 tax cuts, surpassed the government’s projection by 25%. Tax revenue as a share of GDP hit 20% last year, one of the highest levels in history. The data suggest states that want to improve their budgets should shelve tax hike plans in favor of reducing tax burdens.
Just don’t expect the tax compact architects to recognize this logic. They seem to care more about punishing the wealthy than raising revenues. Perhaps a better name for these states — or at least their wealth tax sponsors — is the “Socialist Seven.”
Read the full op-ed in the Washington Examiner here