“Tax Flight” is a Myth; DC Should Raise Taxes on the Wealthy for a Just Recovery

The District can use American Rescue Plan dollars to recover from the COVID-19 crisis and truly “build back better,” if we:

  1. Target aid to people who are struggling the most to make ends meet;
  2. Address longstanding racial and economic inequities; and,
  3. Plan for the longer-term and sustain momentum toward an antiracist and equitable future by raising local revenue.

The DC Council can raise over $100 million to fund a strong, citywide recovery by raising taxes on DC’s wealthiest households—a policy solution that 80 percent of DC voters support and that the Fair Budget Coalition has recommended. A higher tax rate on income above $250,000 would raise taxes on just three percent of DC taxpayers, and about 90 percent of the revenue raised would be paid by households with incomes of about $1 million or more, according to the Institute for Taxation and Economic Policy. Increasing taxes on the wealthiest—who are currently undertaxed and have seen their incomes and savings grow during the pandemic—would help DC to build momentum in critical areas of need, like early learning for infants and toddlers, housing affordability and preservation, and homelessness prevention.

Some opponents to raising taxes on DC’s wealthiest residents or profitable businesses claim that it could cause those residents or businesses to move to neighboring states. However, these claims don’t stand up to empirical scrutiny. Research from real-world examples shows that—by and large—people don’t decide where to live based on taxes. In fact, every state that has increased taxes on the wealthy raises more revenue than they lose, if they lose any at all, because most high-income residents stay. While some households may leave a place because of tax increases, the idea of massive tax flight has been proven to be a myth many times over.

The myth-busting research shows:

  • State taxes have little-to-no effect on whether and where people move, a comprehensive report by the Center on Budget and Policy Priorities (CBPP) shows. CBPP points out that few people move, and when they do its most often due to employment changes or for family reasons. In addition, people who move are just as likely to move from low to high tax states as the other way around. CBPP’s review of academic studies also finds that most research shows that taxes have a negligible effect on interstate migration. Of the eight states that have created millionaire taxes since 2000, six of them have seen their economies grow faster than their neighbors, according to a separate 2019 report from CBPP.
  • A groundbreaking study by Cristobal Young on taxes and millionaire migration—which examined the tax returns for every household reporting income of at least $1 million between 1999 and 2011—fully debunks the notion that millionaires flee en masse from higher- to lower-tax states. In fact, millionaires have a slightly lower migration rate (2.4 percent) than the general population (2.9 percent). In a given year, just 0.3 percent of all US millionaires are motivated to move to another state for lower taxes. And if millionaires who move to Florida were excluded, that rate would drop to roughly 0.07 percent. (The latter statistic is based on DCFPI’s calculation using Young’s methods in slides 28-32 and slide 40 here).
  • Young’s research also shows that the magnitude of the effects of taxes on migration would need to be 10 to 15 times higher for it to be a relevant consideration in tax policy decisions. In fact, higher taxes on millionaires have negligible effects on the “stock” of millionaires in a state. That’s why it’s not surprising that three of the five states with the most millionaires have a “millionaire’s tax.” Moreover, because of the small number of millionaires who move based on taxes, revenue raised through a tax increase on millionaires would exceed any revenue loss from those moves.

For years, the tax flight myth has survived based on cherry-picked anecdotes of millionaires moving—or sometimes threatening to move—due to claims of high taxes. Meanwhile, stories of wealthy people who want to be taxed more for equity and the common good are shared less often. Instead of catering to unfounded anecdotes and ginned-up concerns with no basis in reality, DC’s taxes should be structured in a way that raises the shared resources we need to build widespread prosperity and thriving, equitable communities. The District’s communities deserve proven policy—not mythology.

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