One of the practical problems with the boilerplate “tax the rich” strategy is that the rich are not stupid. When taxes in one state rise to an unacceptable level, they move to another where the tax rate is more to their liking. The new state gets a big infusion of tax revenues and the progressives in the high-tax state sit scratching their heads because their tax base has mysteriously disappeared.
We reported in May that after passing a millionaire surtax nearly one-third of Maryland’s millionaires had gone missing, thus contributing to a decline in state revenues. The politicians in Annapolis had said they’d collect $106 million by raising its income tax rate on millionaire households to 6.25% from 4.75%. In cities like Baltimore and Bethesda, which apply add-on income taxes, the top tax rate with the surcharge now reaches as high as 9.3%—fifth highest in the nation. Liberals said this was based on incomplete data and that rich Marylanders hadn’t fled the state.
Well, the state comptroller’s office now has the final tax return data for 2008, the first year that the higher tax rates applied. The number of millionaire tax returns fell sharply to 5,529 from 7,898 in 2007, a 30% tumble. The taxes paid by rich filers fell by 22%, and instead of their payments increasing by $106 million, they fell by some $257 million…
And it gets worse. Maryland lost one in eight millionaires from 2007 to 2008 and approximately $1 billion of its net tax base because people fled Maryland to more hospitable places. Montgomery County, one of the state’s wealthiest, got clobbered. It lost over $4.5 billion dollars in taxable income between 2007 and 2008 and the number of returns over a million dollars plummeted by 27 percent.
Have the progressives running my state learned anything? Of course not. According to the WSJ, the Democrats are pushing two bills to extend the tax hikes past their 2010 expiration date. They’re getting the usual distortions from union-backed groups like Citizens for Tax Justice and Maryland Democrats still believe that this tax will raise revenue, despite direct evidence to the contrary.
No, the rich aren’t stupid, but some days I wonder about progressives.