Claims that tax increases drive large numbers of people to move to a different state are simply untrue, according to new Center on Budget and Policy Priorities (CBPP) analysis of Census and IRS data on interstate migration. Evidence shows that people choose where to plant roots based on job opportunities, family, and the cost of housing. Exaggerated claims of “tax flight” should be set down once and for all, and DC lawmakers should pursue racially equitable tax changes that ensure the wealthy pay their fair share and raise the shared resources we need to build widespread prosperity and equitable communities.
While the myth that increased taxes will drive mass flight of high-earning residents from a state has survived on cherry-picked anecdotes, researchers have disproved this claim many times over. According to the CBPP report:
- Only a small percentage of people move to another state in a given year, and that percentage has steadily decreased in recent decades (to 1.5 percent in 2020), even while tax differences between states have increased.
- Large numbers of people move from states with lower taxes to states with higher taxes[1] every year, and the large majority of households (overall or high income) moving out of higher-tax states are replaced by ones moving in.
- High income households are a small share of those leaving higher tax states. More than three-quarters of net out-migration in higher tax states is attributable to the moves of households with incomes under $200,000.
- Substantial research demonstrates that high housing costs are a major driver of interstate migration, both encouraging out-migration and deterring in-migration.
In 2021, the District raised DC personal income taxes on residents with annual taxable incomes above $250,000, or four percent of taxpayers. The revenue from the tax increase supports historic investments in higher wages for early childhood educators, housing for families and individuals experiencing homelessness, and the expansion of DC’s Earned Income Tax Credit. These investments largely benefit Black and brown residents, and particularly women, advancing racial and gender equity in the District.
Still, DC’s richest residents continue to pay less in DC taxes as a share of their income than middle-income residents and extreme income and wealth inequality persist. White households hold 81 times the wealth of Black households and just 1,500 households hold nearly half of all wealth in the District.
DC’s tax system continues to give advantageous treatment to capital gains, inherited wealth, property ownership and more. For example, capital gains—the profits from selling an asset such as shares of stock, mutual funds, or real estate—are held overwhelmingly by the wealthiest households. In DC, when these gains are cashed in (or “realized”) they are taxed at the same rate as wages and salaries from work, even though they accrue to wealthy households just by virtue of them having wealth to invest.
The tax code also privileges capital gains that have not been cashed in (or are “unrealized”) that get passed along to a taxpayer’s heirs. A person who inherits such assets and decides to cash them in would only pay taxes on the gains made while they held those assets, which means that any gains accrued since the assets’ original purchase go altogether untaxed. This tax privilege is called the “stepped-up basis” and nationally its benefits go almost entirely to the top 1 percent of households, and the lion’s share to the top 0.1 percent. These advantages further concentrate wealth among the highest-income residents, who are predominantly white while depriving DC of needed revenue, compounding racial inequity in wealth and income.
Taxing wealth more would help correct the racist harm in the tax system, raise resources for the District, and as the new report from CBPP confirms, have little to no impact on where wealthy households choose to live. Higher taxes would barely affect the well-being of these households, since they spend only a fraction of what they earn.
DC communities will be stronger if all residents are able to pay rent, feed their families, and contribute to the economy. By ensuring the wealthiest pay taxes on the full array of resources they have accumulated in an economic system built to privilege them, policymakers can fund a sustainable and more equitable future for the District.
[1] For comparisons in the CBPP analysis, a state is considered “higher tax” if, averaged over the 2011-2021 period, it fell in the top ten states ranked by the top-bracket personal income tax rate, personal income tax collections as a share of personal income (as reported by the Bureau of Economic Analysis in the Commerce Department), or total state and local taxes as a share of personal income. Using all three criteria and looking at the top ten states that satisfy at least one of them resulted in a list of 18 states that includes essentially all the states that are regularly held up as tax flight examples.
