Why Bill de Blasio's Tax Hike Won't Cause the Wealthy to Flee New York
Conservative opposition to New York City Mayor-elect Bill de Blasio’s plan to increase taxes on the wealthy is built largely on scare tactics. A growing chorus warns that looming tax hikes will scare away the rich and what’s left of the middle class, bringing back the economic and fiscal distress of the bad ol' days.
In a television ad last month, Connecticut Republican gubernatorial candidate Tom Foley appealed to what he feels is an obvious new constituency – New Yorkers who are “thinking about leaving” after their new mayor’s election. A week later, New Jersey Governor Chris Christie made a similar offer to the city’s super rich. “You have a new mayor in New York who is aggressively talking about increasing taxes in New York City,” Christie said in a speech to the Wall Street Journal CEO Council. “While I feel badly for New Yorkers, come to New Jersey.”
Such loaded rhetoric bears little relationship to the facts. Keep in mind that de Blasio is proposing to raise the city income tax rate on people who make more than $500,000 by just one half of one percent, from its current rate of 3.9 percent to 4.4 percent. And, more importantly, several careful economic studies show that even considerably larger taxes on high earners and wealthy individuals – so-called “millionaire taxes” – have little effect on where the rich choose to live and their propensity to move from one city or state to another.
Two of the leadin g voices on this question are Charles Varner, a sociology graduate student at Princeton University and Cristobal Young, a sociologist at Stanford University. In the last few years, the two have published studies on the relationship between tax increases on high earners and the migration of wealthy people from two states: New Jersey and California [PDFs].
In 2004, New Jersey raised the marginal tax rate on income above half a million dollars a year by 2.6 percent – more than five times de Blasio’s proposed New York City hike. The tax hike had little effect on the migration of millionaires out of the state. The authors found only the slightest increase in out-migration for millionaires under the new tax policy, just 5.2 households per thousand. The number of millionaires, and by extension the base for this newly heightened tax rate, was determined far more by year-to-year changes in state residents’ income than by people moving to flee unfavorable tax situations.
In California, the pair found similar results when looking at the effects of two policy changes that occurred between 1994 to 2007: a 1996 tax cut for high-income residents, and the introduction of a 2005 “millionaire tax” of 1 percent on taxable income greater than $1 million. For the tax cuts enacted in 1996, the authors found essentially no clear pattern of increased in-migration of wealthy residents from nearby states looking for better tax situations. Changes in income accounted for nearly 90 percent of the year-to-year shifts in the number of wealthy residents. As for the 2005 millionaire tax, they found that there was essentially no effect – just “zero-plus-noise.” (In fact, across the board, the biggest predictor of a millionaire’s decision to leave the state was whether he or she got divorced.) Their conclusion: “Migration is a very small component of changes in the number of millionaires in California.”
The basic fact is that it is not taxes but other, more compelling and substantial factors that are drawing more and more high-skilled, productive and, yes, rich people to places like New York City, Los Angeles, the Silicon Valley and San Francisco. As University of Michigan economist David Albouy has noted, these places offer a powerful combination of enhanced productivity and greater “quality-of-life” amenities. He looked at housing and land value, along with data on trade productivity and quality-of-life measures and found that diverse, vibrant, and interconnected cities like San Francisco, New York, Los Angeles, and San Diego are the most “valuable” large metros.
The knowledge economy boom is propelling this trend forward. My own research and that of others document the trend of higher skilled, more affluent people and even high-tech companies and talent flocking back to urban centers. A recent study of the location choices of “ultra high net worth” individuals (those with a net worth of $30 million or more) found that between 2012 and 2013 their ranks increased by 4.1 percent in New York State, 14.7 percent in California, and 35.2 percent in Massachusetts, a state conservatives like to dub “Taxachussets.”
The reality is that de Blasio’s modest tax hike will do nothing to alter the fundamental factors that draw and keep rich people in New York City. As Christopher Caldwell of the Financial Times put it:
Half a percentage point on the taxes of about 40,000 rich New Yorkers sounds far too low to provoke a rush to the exits. If you move, do not expect to replace that former member of the Vienna Philharmonic who is teaching your daughter the oboe, your jogging route around the Central Park reservoir or your sake-tasting club. New York is just different.
The much more likely outcome is that rich people will continue to pour into de Blasio's New York City. The luxury property market shows no signs of slowing down following de Blasio’s election, and finding ways to reduce the pressure on the city’s real estate market and create more affordable, middle-class housing is the far more important task ahead for de Blasio. A small tax on these wealthy individuals is a symbolic gesture and one that creates a modest level of resources for the new mayor to make good on his campaign promise to reverse the “tale of two cities.” De Blasio explained the connection between taxes and opportunity quite simply in his election-night victory speech. “When we call on the wealthiest among us to pay just a little more in taxes to fund universal pre-K and after-school programs, we aren’t threatening anyone’s success,” he told the crowd. “We are asking those who have done very well to ensure that every child has the same opportunity to do just as well as they have. That’s how we all rise together.”
Conservatives need a new mantra that goes beyond out-of-date scare mongering about taxes on the wealthy. Urbanists of all stripes must instead work to understand the real reasons cities are back and the new kinds of problems their increasing riches bring.
Top Image: New York City Mayor-elect Bill de Blasio, left, joins Mayor Michael Bloomberg for a meeting in the "Bull Pen," the mayor's main City Hall office, in early November (AP Photo/Bebeto Matthews).