Fact: Income Tax Migration is a Myth
The question of whether raising state or local income taxes leads some residents to move out is a legitimate one. The answer to that question, backed by a growing body of research, is a pretty clear “no,” as noted in a recent report aired on NPR. The story, which cited numerous studies that find no evidence that high-income residents high-tail it when modest tax increases are adopted, is further evidence that Mayor Gray’s decision to include an income tax increase as part of his FY2012 budget was reasonable.
Mayor Gray’s proposal would create a new tax bracket of 8.9 percent for taxable income above $200,000 (The current top rate is 8.5 percent and starts at just $40,000). This proposal, combined with a limit on itemized deductions for high-income households would raise $35 million in much-needed revenue in FY2012. The tax increase would average $400 a year for households making $200,000 to $350,000, or less than 0.2 percent of income.
Yet the Mayor’s income tax proposal has been met with resistance from some Councilmembers, who fear the flight of higher-income residents. The researchers quoted by NPR find that this concern is not backed by real-life experience: “[T]axes [have] essentially no impact on causing people to leave a state,” according to Jeff Thompson of the Political Economy Research Institute at the University of Massachusetts, Amherst. This is because high-income residents, like all residents, have ties to their communities — jobs, family and friends, investments — that are unlikely to be shaken by a modest change in taxes. In the case of DC, residents are drawn by employment opportunities, the District’s amazing cultural amenities, and the desire to live in a city environment, among other reasons.
When these studies are considered alongside the fact that DC residents pay the lowest taxes in the region (when property taxes and income taxes are considered) and that high-income residents pay a smaller percentage of their income in taxes than middle-income residents, Mayor Gray’s income tax proposal seems all the more reasonable.
Kudos to Mayor Gray for recognizing that attempting to close a $322 million budget gap with cuts alone, at a time when the needs of District residents remain substantial as a result of the recession, would have had serious consequences. It would have led to even greater reductions to programs that help District families get back on their feet, thereby threatening the critical investments the city has made in education, public safety, and human services. The City Council should not undo this modest income tax proposal on little more than a hunch.