Higher Taxes = More Avoidance

Rich taxpayers in Maryland are vanishing

Illinois Governor Pat Quinn is the latest Democrat to demand a tax increase, this week proposing to raise the state’s top marginal individual income tax rate to 4% from 3%. He’d better hope this works out better than it has for Maryland.

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.

John Galt must have passed through. The smartest thing a state can do is to lure rich, successful people to the area with low tax rates. It builds the tax base and it increases entrepreneurship.

(On the other hand, statists will likely try to enact more laws preventing private parties from leaving an area, or forcing them to pay taxes on capital leaving their localities. Or equally as likely, the feds will begin setting blanket interstate tax policy, which would prevent the competition of ideas between states.)