Actions have consequences

America is a land of taxation that was founded to avoid taxation.~Laurence J. Peter

As I wrote on July 4, many (most?) of our state and federal congressional leaders have no real business experience. When expenses rise the solution to balancing the budget is rarely ‘spend less’. Instead the answer is more often ‘raise taxes’ or make the rich pay more. But politicians forget that money is mobile. The wealthy can move and businesses can relocate to another state or overseas if local conditions become unfavorable.

The Wall Street Journal looks at an attempt by Maryland to “soak the rich” which resulted in “Millionaires Go Missing”

Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O'Malley … declared that these richest 0.3% of filers were "willing and able to pay their fair share." The Baltimore Sun predicted the rich would "grin and bear it."

One year later, nobody's grinning. One-third of the millionaires have disappeared from Maryland tax rolls. [Down to 2000 from 3000 filers] … On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires [combined] paid $100 million less in taxes than they did last year -- even at higher rates.

The WSJ in “Soak the Rich, Lose the Rich” notes that California, Connecticut, Delaware, Illinois, Minnesota, New Jersey, New York and Oregon are also trying to raise taxes on the wealthy. The rich respond by moving:

We found that from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.

Do low-tax states lack key services. No, they just budget better.

[New Hampshire] the Live Free or Die State has no income or sales tax, yet it has high-quality schools and excellent public services. Students in New Hampshire public schools achieve the fourth-highest test scores in the nation -- even though the state spends about $1,000 a year less per resident on state and local government than the average state and, incredibly, $5,000 less per person than New York. And on the other side of the ledger, California in 2007 had the highest-paid classroom teachers in the nation, and yet the Golden State had the second-lowest test scores.

Bottom Line

Some states have learned this lesson. Maine just reduced state taxes in the hope of drawing people to it.

Other states are still in the dark. North Carolina just passed a bill to tax online sales. In response Amazon has shut down the affiliate program in NC.