High Earner Flight? Not Quite.
The Goldwater Institute’s report on Prop 208 contains some egregious cherrypicking and misrepresentation of studies.
Proposition 208 made it back on the ballot after an Arizona Supreme Court ruling. Unable to dispose of the ballot measure through legal maneuvering, the Chamber of Commerce and other conservative groups have been taking plenty of shots at it.
The Goldwater Institute commissioned a report warning of the potentially dangerous effects of the measure passing. A lot remains to be examined here (and I hope to do so at a later date) but a specific portion of it stands out as particularly sloppy.
High Earner Migration
The portion in question is in regards to top-earner migration. Prop 208 would effectively create a new tax rate on incomes above $250 thousand a year. The logic goes that wealthy earners would then flee the state to avoid this taxation.
The Goldwater report says the economic cost they calculated does not include the impact of high earners fleeing the state to avoid the tax, but warns this is yet another danger likely to occur from Prop 208.
From the report:
[A]s observed by the Arizona Joint Legislative Budget Committee in its own analysis of Prop. 208, multiple academic studies have documented the risk of high-income earners leaving a state in response to dramatic increases in a state’s top marginal tax increase.[8]
This paragraph’s citation links to fiscal analysis from the Arizona Joint Legislative Budget Committee. The “multiple academic studies” mentioned are actually two papers by the same authors (Cristobal Young and Charles Varner).
I suppose this technically qualifies as “multiple academic studies”, but boy is it worth actually reading these studies. I will quote from the the 2016 study mentioned, emphasis mine:
The most striking finding of this research is how little elites seem willing to move to exploit tax advantages across state lines in the United States. Millionaire tax flight is occurring, but only at the margins of statistical and socioeconomic significance.
While the study does find some effect from tax rates on migration of the wealthy, the authors spend much of the conclusion noting the many factors that make the wealthy less mobile.
In other words, there are major costs—both economic and social—for a top-earner migrating to a different state:
- Social costs: “They more often have family responsibilities — spouses and school-age children that embed them in place.”
- Economic costs: “They own businesses that tie them to place. And their elite income itself embeds them in place: millionaires are not searching for economic opportunity — they have found it.”
The second point is fairly important — the salaries of high earners do not necessarily follow them across state lines. Millionaires do not become millionaires in a vacuum. Where one lives has an outsized impact on earnings. Again, from Young et al. (2016):
Millionaires do not use their higher income to achieve greater mobility across states, but rather are more grounded in their states. The rich are different from the general population. They more often have family responsibilities — spouses and school-age children that embed them in place. They own businesses that tie them to place. And their elite income itself embeds them in place: millionaires are not searching for economic opportunity — they have found it.
In a recent AZ Central OpEd authored by Jim Rounds (one of the Goldwater authors) and Kevin McCarthy, the Young study is again mentioned. This time they put a number out there: that around 8% of wealthy earners will flee the state.
Best I can tell, they are calculating this number using the population elasticity given within the Young study—and they are calculating it wrong.
As the AZ Legislature report notes, the Young study estimates change in the millionaire population in relation to the change in the combined federal and state top rate. McCarthy and Rounds seem to only be calculating this from the change in state tax rate alone—which again—is the wrong way to calculate this.
They are citing a study which contains the line, “[B]ecause migration flows represent a very small share of top income-earners, the observed patterns of migration have little impact on the millionaire population tax base even over 13 years”.
This is a very different claim than what is being made by the Goldwater Institute.
It seems worth noting that Cristobal Young — one of the authors of the study in question — wrote a book in 2017 about this very topic. The book is called The Myth of Millionaire Tax Flight and you can buy it here.
The Goldwater report continues:
This is an especially significant risk to Arizona because migration data over the past four years shows that thousands of people are fleeing high-tax states to those with lower tax burdens. In fact, the states with the largest tax burden lost nearly 600,000 households and over $33 billion in aggregated income in 2016 alone.[9]
The citation here is a study by the libertarian Cato Institute. As with the Stanford study, the Goldwater Institute seems to have skimmed over some key parts of the reading.
A lot of this is pretty basic correlation versus causation stuff. Some of it is just simply reading the study, which after reviewing the existing studies on the effects of tax rates and interstate migration, says:
In sum, numerous statistical studies have found that taxes affect interstate migration, but some studies have contrary findings.
Interesting stuff! Much less conclusive than the Goldwater report would have you believe.
This study mentions surveys conducted of Americans who have moved, which find cost of living and housing issues to be among the top factors in why individuals migrate to a different state.
This is really important: many high tax states (like California and New York) have another issue. They have simply failed to build enough new housing to meet demand, spiking housing costs. If we are concerned about losing people, a better strategy might be a push to cut back on onerous land-use policies that artificially restrict the supply of housing.
While it may be true that states with high tax rates are seeing out-migration, this does not mean that the high tax rates are the cause. A number of other factors—such as housing costs—may be a larger cause.
The Goldwater Institute’s report makes some other claims that are worth investigating, which I may do later. However, the only place I could find academic studies cited within the report were in regards to migration.
Sadly, the authors of the report either did not actually read through the studies and the conclusions made within them, or they are intentionally cherrypicking and misrepresenting the studies.
Either possibility should call into question the remainder of the report.
UPDATE:
Cristobal Young responded with a series of tweets explaining how to correctly calculate high earner migration.
