Supporters of a massive increase in New York State’s marginal income tax rates are crowing over an article in today’s New York Times, headlined “Taxes Not Seen as Making the Rich Flee New York.”  The article (in which I’m quoted) focuses on whether higher income tax rates will cause more “rich” New Yorkers to “flee” – rather than on the broader economic impact of tax hikes — because that’s how Governor David Paterson and Mayor Michael Bloomberg have framed the issue.

In fact, fixating on the migration patterns of the wealthy plays into the soak-the-rich crowd’s portrayal of the economy as a zero-sum game, in which tax policy is an exercise in income redistribution.  Wealth, in the most extreme version of this worldview, is a static, sticky and selfishly guarded thing – piles of greenbacks hoarded by people who occasionally move their goods from one hole to another, like Humphrey Bogart in “Treasure of the Sierra Madre.”

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Would higher taxes cause them to flee?

It’s not clear whether the governor shares this view.  Bloomberg, having created (and not simply accumulated) a great fortune of his own, certainly knows better–even if his policies as mayor have occasionally pointed in other directions.  Yet the fact that a lot of people do think this way is a big reason why the “fair share” tax proposal, which would raise income taxes by 20 to 50 percent on incomes starting at $250,000, has gained any traction at all in Albany.

Certainly the events of the past year have been an especially vivid reminder of how people can become rich, at least temporarily, through a combination of sheer greed, excess debt and outright fraud.

But real wealth—the kind we want to attract to New York–is a dynamic thing.  It is constantly being created, destroyed, reallocated, reshaped and renewed by the commercial activities, ideas and decisions of countless individuals interacting in a (mostly) free-market economy.

Most economists agree that government policy, especially income tax rates, can powerfully affect incentives to save, invest and earn money.  Debates at the national level over the impact of high marginal tax rates must take on an added dimension at the state and local level, since taxpayers can dramatically alter their incentives merely by moving to another jurisdiction.

In any case, “wealth” is not the same thing as “income,” which is both variable and mobile.   And income is not the same as “taxable income,” which is the basis of most state government revenue, and which can be manipulated by anyone who can afford a good tax adviser.

So the most important question in Albany’s current tax debate is not how many of New York’s already-wealthy residents (however “wealthy” is defined) will respond to higher taxes by physically leaving the state.  Some surely will.  Others won’t.

The overriding question is how many creative, entrepreneurial people–including some high-bracket taxpayers already based in New York, and others who are neither rooted here nor wealthy at the moment–will be motivated by higher tax rates to invest capital and create jobs somewhere else.

A 50 percent boost in New York State’s marginal income tax rate, the biggest since 1961, would be a strong new disincentive to earn more income in New York.  There is no lack of economic research indicating that if the Empire State raises its marginal tax rate to over 10 percent and the city’s combined resident income rate to nearly 15 percent—both far above the regional and national averages—New York’s economy will grow more slowly.

Yes, for the time being, state and local government employees represented by the unions pushing the income tax hike will retain their jobs and collectively bargained pay increases, pensions and other benefits.  Meanwhile, however, fewer private-sector jobs will be retained or created.  At least 22,000 fewer private jobs, by one estimate.

So, assuming the worst, let’s say some form of “millionaire tax” is part of the final state budget deal.  New York currently has about 45,000 resident households with incomes over $1 million.  In three years, assuming a modest national economic recovery, it would not shocking to find that we still had at least 45,000 households with incomes over $1 million – although they wouldn’t all be comprised of the same people.

But New York’s economic recovery will have been hampered.  Revenues will grow more slowly than they would have in the absence of a tax hike.  And as research by the independent Rockefeller Institute of Government shows, increasing the dependence on a handful of wealthy taxpayers will make Albany’s revenue base even more volatile.  That will mean more tax increases, and more unplanned budget cuts, in years to come.

The standard for evaluating the state’s tax policy options should be the potential impact on economic growth and job creation–not the nominal headcount of high-income households.  If Paterson and the Legislature agree to jack up state income tax rates, growth and employment in New York will surely suffer.  And that is why it’s a bad idea.

About the Author

E.J. McMahon

Edmund J. McMahon is Empire Center's founder and a senior fellow.

Read more by E.J. McMahon

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