Tax Reform

Taxpayers Flee Maryland

A recent study by the non-partisan group Change Maryland is garnering significant attention after finding more evidence that the state’s wealthiest residents are being driven out by excessive personal income taxes. Change Maryland’s study found that a net 31,000 residents have exited the state since the imposition of a “Millionaire’s Tax” in 2007. The tax, signed into law by Governor Martin O’Malley, imposed a personal income tax rate of 6.25 percent on residents with an annual income of $1 million or more. However, as ALEC’s Rich States, Poor States points out, when you add in Maryland’s burdensome local income tax rates, Maryland taxpayers faced a combined income tax rate of more than nine percent. The study estimates that the out-migration of Maryland residents has had a net negative impact on the state’s fiscal health, costing approximately $1.7 billion in lost tax revenues over the past five years. The highest levels of out-migration were found in Maryland’s wealthiest counties, suggesting that the state’s higher-income residents are the ones “voting with their feet” to avoid excessive taxation.

After picked up the story on July 9th, Maryland Governor Martin O’Malley’s office offered a prompt but misleading rebuttal the following day. Gov. O’Malley’s office responded to the study by claiming that the percentage of millionaires in Maryland had, in fact, increased during the governor’s term. These claims were based on an annual study by Phoenix Marketing International (PMI), which classifies millionaire households as those having over $1 million in assets, rather than $1 million in annual income. This definition of “millionaires,” however, is likely to include many households earning less than $1 million in annual income – the threshold for the governor’s Millionaire’s Tax. As others have pointed out, households with annual incomes as low as $100,000, for example, could conceivably amass $1 million in assets by retirement. To claim that these households have increased in number under the governor’s term says little about the impact of the Millionaire’s Tax on the group in question —households with annual incomes exceeding $1 million. As a result, claims based on PMI data are a poor rebuttal to the central message of Change Maryland’s study.

The Tax Foundation has also pointed out some other questionable uses of data in the Governor’s response, mostly as they relate to regional comparisons of Maryland’s tax competitiveness. Most notably, the Tax Foundation highlights Maryland’s precipitous drop to 42nd overall in the State Business Tax Climate Index rankings this year.

Maryland’s poor tax competitiveness rankings should come as no surprise. Just this year, the state has increased its sales tax, alcohol tax, tobacco tax, and personal income tax rates. In total, Maryland has added 24 new taxes or fees in recent years. “The list goes on and on,” explains Change Maryland’s website. “We’d need another website just to list all the taxes and fees they want to increase or have already raised.”

The results from Change Maryland’s study confirm what ALEC’s Rich States, Poor States study has demonstrated for years. For example, the most recent edition of Rich States, Poor States highlights the significant growth levels experienced by states with no personal income tax. States which do not levy the personal income tax, such as Florida, Nevada, and Texas, have been shown to experience stronger employment growth, faster revenue growth, and faster population growth than other states. On the other hand, states which maintain the highest personal income tax rates, such as Maryland, New York, and California, consistently show slower rates of economic growth. The evidence suggests that states should pursue growth by lowering the burden of taxation for all citizens, rather than by selectively targeting high-income earners with excessive rates.

This recent lesson from Maryland sheds light on the implications of over-taxation. Hopefully, these discoveries will encourage the state to implement pro-growth policies that attract high income earners, rather than driving them away.

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In Depth: Tax Reform

Mainstream economists, small business owners and taxpayers across the country understand that growth-oriented reforms mean increased opportunity for all. As demonstrated by the annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, sound tax and fiscal policies are critical to economic health, allowing businesses and households to flourish. A…

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