Here’s what really happens when states raise taxes on millionaires

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Gov. J.B. Pritzker is counting on a tiny fraction of Illinois taxpayers to generate $2.8 billion of the estimated $3.6 billion he hopes to raise through his graduated income tax proposal that will allow the state to tax higher incomes at higher rates. According to a Civic Federation analysis of 2016 tax returns, the 20,000 taxpayers reporting annual income of $1 million or more made up just 0.3 percent of all filers in Illinois.

While taxes would remain the same or decrease for an estimated 97 percent of taxpayers, bills would rise substantially for Illinois’ wealthiest. On average, the Civic Fed estimates, those in the millionaire bracket would see their bills increase $138,272 as their effective tax rate jumps to 7.99 percent from the current 4.95 percent flat rate that all Illinois filers pay.

Taxes on joint filers earning $1 million per year would increase about $21,000, according to the governor’s Fair Tax Calculator, while the $5.5 million in taxable income Pritzker and his wife reported for 2018 would be subject to a roughly $167,000 boost. Megawealthy taxpayers reporting $100 million annually—less than three dozen in 2018—would pay at least $30.4 million more.

Some warn that the 3-percentage-point increase would send top earners stampeding out of Illinois. A big enough exodus by that group could significantly hurt revenue generated by the tax. If a third of taxpayers with income above $100 million left, for example, the state would miss out on $260 million in tax revenue, based on 2018 preliminary Illinois Department of Revenue data.

The question now: How likely is a massive flight of millionaires if Illinois voters approve the proposed constitutional amendment allowing graduated tax rates? The experience of other states that have jacked up taxes on the wealthy offers some insight. While millionaires haven’t abandoned those states en masse, there’s some evidence that the loss of a small number of top earners can have a big impact on the revenue generated by such a hike.

Determining direct impacts of tax hikes can be difficult: Revenues fluctuate based on ups and down in individuals’ earnings and people moving in and out of the state. Reasons for migration also vary—people move for housing, work, weather and, in some cases, better tax rates.

"It’s really complicated," says David Merriman, a professor of public administration at the University of Illinois at Chicago who has studied revenue implications of tax hikes in other states. But Merriman says most studies show relatively few millionaires leave states that impose millionaire taxes. "Millionaires did not desert New Jersey when they had a tax similar to what we’re talking about doing in Illinois," nor have they deserted other high tax states like New York or California, he says. "There’s reason to believe we’re going to get a lot of tax revenue from doing this new, higher tax, and we’re not going to lose very many high-income people."

But both Merriman and professor Paula Worthington, a senior lecturer at the University of Chicago’s Harris School of Public Policy and a former senior economist at the Washington, D.C.-based Council of Economic Advisers, says findings out of California should give policymakers pause. One study found a loss of a small number of high-wealth taxpayers, coupled with behavioral changes like tax avoidance by others, cut potential additional revenue by nearly half in the first year following that state’s hike on top earners. "Those are big numbers," Worthington says.

Cameron Mock, chief of staff and senior fiscal adviser in the Governor’s Office of Management & Budget, says Illinois expects to lose only a small number of top earners. Based largely on a 2011 study on the impact of New Jersey raising its highest income tax rate by 2.6 percentage points in 2004, officials reckon a modest number at the highest income levels will leave the state, and others will take steps to keep their taxable income below the upper-bracket threshold.

via Crain’s Chicago Business

September 26, 2020 at 11:28AM

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