Millionaire Tax Didn’t Chase the Rich From Jersey, So Why Not a Higher Tax Rate on Pa.’s Top Earner

A blog post from Stephen Herzenberg, originally published on Third and State.

Anti-tax advocates maintain that higher tax rates on the wealthy lead to millionaire flight. But a study of a 2004 “millionaire tax” in New Jersey shows that, in fact, the rich don’t move to avoid higher taxes.

The new study was written by sociologists at Stanford and Princeton and published in The National Tax Journal. Economist Robert Frank reported on it in The Wall Street Journal, writing that the study “provides some of the most detailed evidence yet that so-called millionaire taxes have little effect on the movements of millionaires as a whole.”

The 2004 New Jersey tax increased the rate on those earning $500,000 or more from 6.37% to 8.97%. After the change, high-earners not subject to the tax (with income between $200,000 and $500,000) migrated out of state at the same rate as those who were subject to the tax. “In summary, the new tax did not appreciably increase out-migration,” the study concluded.

Even before this study, we knew that Pennsylvania badly needs to raise revenue to maintain critical services and investments in the future. We also knew that the top 5% of Pennsylvania earners pay an overall state and local tax rate that is about one-half that of the lowest-income fifth of taxpayers (see Institute for Taxation and Economic Policy data for Pennsylvania).

Raising the Pennsylvania tax rate on “unearned income” (including capital gains, dividends, and other non-wage income) by just 2 percentage points – from its current 3.07% to 5.07% – would raise $635 million. The rate on earned income could remain the same at 3.07%. The increase in the unearned income rate would mostly impact top earners in Pennsylvania but still leave the tax rate on unearned income far below the tax rates in New Jersey and most other neighboring states.

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