Monday, December 07, 2009

How Many Millionaires Have Left Maryland Because of the Millionaire Tax?

In the wake of last year’s imposition of the so-called “millionaire tax,” tax return data has set the press and the Maryland Republican Party howling. The Sun, the Post and the conservative-financed all noted that the number of Maryland millionaires dropped by 30% since the tax was imposed. GOP House Minority Leader Tony O’Donnell told the Post, “People are going to protect their interests. People are going to move.” The Sun stated that the Comptroller’s office had “no explanation” for the drop and said, “Maryland was depending on taxing millionaires, but they’re disappearing.” The Wall Street Journal cried, “Maryland’s fleeced taxpayers fight back,” and called the tax “soak-the-rich economics.”

But how many people actually moved out because of the tax?

The tax data shows that the number was, at most, about two percent of the state’s millionaires.

To understand the impact of the millionaire tax, we need to know three pieces of information. First, we need to know the total number of people in the state reporting one million dollars or more of taxable income in several successive years. Second, we need to know the percentage of those people who filed Maryland tax returns in the following years. And third, we need to know the percentage of those people who reported maintaining their million-dollar incomes in the following years. All of that data was available in a letter from the Comptroller’s office. But no media sources bothered to analyze it. That changes today.

Below is a chart showing tax statistics on Maryland millionaires since calendar year 2000. The number of millionaires fell from 3,802 in 2000 to 2,780 in 2002, rose to 7,067 in 2007, and then fell to 4,910 in 2008 – the first year of the millionaire tax. The 30.5% drop from 2007 to 2008 was widely reported in the media, but no one reported that the 2008 count (4,910) was 76.6% higher than in 2002 (2,780).

The percent of Maryland millionaires filing Maryland income tax returns in the following tax year has consistently been over 90%. After all, millionaires hit the jackpot, move out and die in all years, both good and bad. The reason why the 2008 total was so much lower than 2007 was because just 49.5% of 2007 millionaires reported earning more than one million dollars in 2008, the lowest percentage since the dotcom bust hit top-level incomes in 2000. The economy is BY FAR the primary reason why the number of millionaires dropped.

Still, the percentage of 2007 millionaires who filed Maryland tax returns in 2008 (92.3%) was slightly lower than the average of the preceding seven years (94.3%). Suppose that the percentage of 2007 millionaires who filed Maryland returns the following year equaled the long-run average of 94.3%. If that was the case, 6,667 of the 7,067 millionaires in 2007 would have filed 2008 returns. Instead, 6,525 filed 2008 returns, a drop of 142 millionaires - or 2% of the 2007 millionaire count - from the expected historical pattern. So the data shows that just 2% of Maryland millionaires may have left the state because of the tax or other reasons (like deaths). The exact explanation for their departure is a matter for speculation in the absence of other data.

Now that is not the final word on the subject. The millionaire “tax” is actually a three-year surcharge that took effect in calendar year 2008. It could be that many of the state’s super-wealthy are waiting out the surcharge until it expires, especially if the recession causes their incomes to temporarily drop below the million-dollar threshold. If the surcharge is made permanent, a possibility contemplated by some in the General Assembly, then more of these people could very well leave. Also, this data can never answer the question of how many millionaires decide not to move into Maryland because of its tax structure in the future. That is an important factor in the state’s ability to attract entrepreneurs and international headquarters. Just because that phenomenon cannot be measured does not mean that it does not exist.

But at this point, there is simply no evidence that any mass exodus of millionaires has occurred.

We reprint the letter from the Comptroller containing the tax data below.