Flight of the rich: truth or myth?
“Florida appears to be the core pathway for tax-induced migration.” Study, American Sociological Review
Part of an occasional series exploring wealth and income inequality in Connecticut and its impact on a state struggling to cope with massive debt.
For nearly a decade, it has been the favorite argument of those opposed to higher state taxes for Connecticut’s wealthy — migration.
Simply put, if you tax them, they will leave. For Republicans — and many moderate Democrats — income and wealth migration is not only a very real threat, but a problem that’s already upon us as Connecticut increasingly raises taxes to cover surging pension costs.
Among labor, urban Democrats and other progressives, however, the millionairewith-a-suitcase is amyth, a fiscal boogeyman used to scare liberals.
But despite the preponderance of stories of wealthy residents fleeing Connecticut, the empirical evidence shows the rich tend to move less frequently than low- and middle-income residents. The need for employment is still one of the main reasons people move while home and business ownership — most common among high-income households — promote stability.
More importantly, income migration hasn’t been a big driver of states’ overall economic health. One of the largest tax cuts for the rich in modern Connecticut history nearly three decades ago did not spark a influx of millionaires into
this state.
But that doesn’t mean Connecticut has nothing to fear.
Research shows the wealthy pay more attention to state tax rates than any other economic class. Although the sample size is small, the ratio of income leaving Connecticut versus that moving in has accelerated in the last few years.
As decades of fiscal carelessness at the Capitol garner increasing media coverage, Connecticut’s affluent can see a scenario in which they long have been targeted to pick up the tab. And as politicians raise state taxes with increasing frequency, while the highways and rail systems serving Fairfield County slow down, wealthy families say they are losing patience.
“People move because of professional opportunities,” said University of Connecticut economist Fred Carstensen, who heads the Connecticut Center for Economic Analysis. “They retire and choose a lifestyle, which leads some to move. Taxes have ranked as a particularly strong driver. It’s not that important. But it’s a convenient thing to talk about.”
But former hedge fund manager David Stemerman of Greenwich, a Republican who centered his 2018 gubernatorial bid on a message that Connecticut taxpayers have been taken for granted for decades, said a reckoning is underway.
2018 Republican gubernatorial contender David Stemerman
“This assumption that the wealth in Fairfield County would always be there was built up, to some degree, by a lack of engagement from Fairfield County,” Stemerman added. “But they also have the view that they’ve been taken advantage of. Well, the door swings both ways.”
Migration trends at first glance
At first glance, income migration appears very real.
Connecticut lost $16.33 billion in annual federally adjusted gross income between 1992 and 2016 according to an analysis of tax data prepared by regular Forbes contributor Travis H. Brown, creator of the website howmoneywalks.com
It was one of 25 states that lost income during that period due to migration.
There are exceptions. Hawaii, which ranks third in median household income, gained a modest $933 million in annual adjusted gross income. [The biggest winners and losers saw differentials in the tens of billions of dollars.]
But many of the biggest losers on that list are states that ranked — and still rank — among the highest in income in the nation. Besides Connecticut it also includes California, New Jersey, Maryland and Massachusetts.
In other words, the people moving out of rich states usually are richer than the people moving in, year after year.
Not surprisingly, the reverse is also generally true.
Of the 10 poorest states based on per capita income, four lost income via migration between 1992 and 2016, and only two — Louisiana and Oklahoma — lost more than $1 billion.
Arkansas gained $2.66 billion during this period, consistently adding income most years — yet still scores badly on most metrics used to measure poverty.
But even after the annual exodus, the rich states usually are still rich and the poor states usually are still poor.
According to statistics from the state Department of Revenue Services, the number of Connecticut households that reported earning more than $1 million erupted upward by 124 percent between 2002 and 2007, after climbing just 8.6 percent over the prior five years. This happened even while income was migrating annually out of the state.
Simply put, the boom within Connecticut overwhelmed any migration trends.
So maybe migration hasn’t been a key factor in moving a state up or down the wealth scale, at least so far.
An analysis published in 2016 in the American Sociological Review concluded the wealthy generally are “embedded elites” and not “transitory millionaires.”
“We find that millionaire tax flight is occurring, but only at the margins of statistical and socioeconomic significance,” wrote the panel of Stanford University sociologists and U.S. Treasury Department economists, who reviewed census data and 45 million tax records dating back 13 years.
Researchers concluded the wealthy are sensitive to state and local tax rates, more so than the rest of the population.
But they are different in other ways as well.
Wealthy households “are embedded in the regions where they achieve success, and they have limited interest in moving to procure tax advantages,” researchers wrote.
Why so? The study found that richer people are more likely to be married — [singles are twice as likely to migrate as couples] — have children, and to own their own homes and businesses.
The study found the migration rate nationally of households reporting more than $1 million in income per year was 2.4 percent — which is lower than the 2.9 percent rate for the general population.
Researchers did find that “Florida appears to be the core pathway for tax-induced migration,” but other low-tax states are nowhere close to being equally attractive to the wealthy.
“When Florida is excluded, there is virtually no tax migration,” the report states.
Major tax hikes coming more frequently
But this doesn’t mean wealth and income migration don’t exist. And there are reasons, Carstensen said, why Connecticut policymakers should be concerned.
For one thing, it’s a short ride to any of Connecticut’s borders.
“We have the highest proportion of residents who work out of state of any state in the country,” Carstensen said, adding that’s a major reason one key metric of economic health has been sketchy.
Is income migration starting to accelerate?
Income migration out of Connecticut may be nothing new, but a small sample size shows the rate appears to be accelerating.
Though IRS tax migration data is available going back several decades, the federal government switched to a new measurement methodology beginning with its comparison of the 2011 and 2012 tax years.
According to that new methodology, the ratio of income leaving Connecticut versus that moving into the state is larger now than it was for most of the past two decades.
And the ratio has risen significantly during the last two years on record.
In 2014 the ratio of income moving out of Connecticut grew 1.31 times faster than the incomes moving into the state — when compared against the previous year.
By 2015 the exit ratio was 1.53-to-1, and by 2016 it had reached 1.80-to-1.
“There’s a whole cottage industry of financial advisers that are talking to people about this (tax trend,) and showing them where else they can go,” said Peter Gioia, chief economist for the Connecticut Business and Industry Association. “That’s what is hurting Connecticut now more than anything, and I think it will continue to accelerate.”
Gioia also dismissed the argument that migration isn’t a problem as long as Florida is the only popular destination. One attractive alternative to Connecticut is risky enough.
“We’re an old state and people want sunny weather,” he said.