December 21 2010

Hunting for Millionaires in Oregon

Hadley Heath

In 2010, we've heard a lot about "runaway spending," but today the Wall Street Journal's Review and Outlook features an interesting account of Oregon's runaway millionaires.  The opening of the piece will make you laff:

Oregon raised its income tax on the richest 2% of its residents last year to fix its budget hole, but now the state treasury admits it collected nearly one-third less revenue than the bean counters projected. The sun also rose in the east, and the Cubs didn't win the World Series.

How can a state raise tax rates and collect less in revenues?  I've written about this before, but there are two important variables in tax collection: the tax rate multiplied by the tax base.  Here's what happened:

In 2009 the state legislature raised the tax rate to 10.8% on joint-filer income of between $250,000 and $500,000, and to 11% on income above $500,000. Only New York City's rate is higher. Oregon's liberal voters ratified the tax increase on individuals and another on businesses in January of this year, no doubt feeling good about their "shared sacrifice."

Congratulations. Instead of $180 million collected last year from the new tax, the state received $130 million.

But the strange thing about these high earners in Oregon is that the change in their behavior that was induced by this change in tax policy did not result in working less.  The theory expressed by the WSJ is that the behavior induced by the tax change was high-tailing it out of Oregon.

One reason revenues are so low is that about one-quarter of the rich tax filers seem to have gone missing. The state expected 38,000 Oregonians to pay the higher tax, but only 28,000 did. Funny how that always happens. These numbers are in line with a Cascade Policy Institute study, based on interstate migration patterns, predicting that the tax surcharge would lead to 80,000 fewer wealthy tax filers in Oregon over the next decade.

One of the best things about a federalist system in the United States is that states can serve as "laboratories of democracy."  When we see how a tax increase fails to collect more revenue in Oregon, we can see what doesn't work.  And then we can look to what does seem to be working:

If Salem officials want to find where the millionaires went, they might start the search in Texas, the state that leads the nation in job creation-and has a top income and capital gains tax rate 11 percentage points lower than Oregon's.

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