Bacon's Rebellion

Democracy Thrives in Sunlight

Do Taxes Matter?

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by

James A. Bacon
in

The extent to which taxes drive economic behavior is a topic of some debate among economic development theoreticians. Some, like myself, believe that, all other things being equal, higher taxes discourage corporations and affluent individuals from investing in, or moving to, a state or region. Others believe that all other things never are equal, and that the effect of taxes are negligible.

We may be getting a real-world experiment, with Virginia and Maryland in the petrie dish.

The experiment will originate from actions on the northern side of the Potomac. The Maryland state Senate, to quote the Associated Press, “is weighing the option of using an income tax increase for people making more than $750,000 a year to replace the computer tax that was approved in the November special session.”

Senators from Montgomery County (who are Democrats, incidentally) say the higher income tax will disproportionately affect taxpayers in the county, which is the state’s wealthiest. Their fear: Wealthy taxpayers may move to Virginia. An alliance of Montgomery Democrats and the state’s Republicans may be sufficient to quash the proposal, however. If they are successful, we’ll never know for sure whether an increase in the state income tax — from 5.5 percent to 6 percent for those earning more than $750,000 a year, and 6.5 percent for those earning more than $1-million — would induce a measurable number of rich Marylanders to forsake their terrapin-hood and embrace the cavalier life of Virginia. (Virginia’s top income tax rate is 5.75 percent.)

But we still may get our social-scientific lab experiment. If the income-tax hike fails, that presumably leaves the computer tax in place. Maryland’s Information Technology industry bitterly fought the measure, which added computer support services, data center support, custom programming, consulting, and disaster recovery services to the list of activities covered by the state’s 6 percent sales tax. (See article in Information Week.) If that tax stays in effect, it is but a short hop, skip and jump to Northern Virginia.

If the tax does drive business behavior, we can predict a growing number of announcements by Maryland-based businesses that they are locating their server farms, data centers and other operations in Northern Virginia. Stay tuned…

Update: Here’s a sample of what Maryland will subject itself to if it keeps the sales tax on computers. In an open letter addressed to Maryland tech firms, dated march 14, Sen. Ken Cuccinelli, R-Fairfax, wrote:

I would like to take this opportunity to personally invite you to relocate your business to the Commonwealth of Virginia. Virginia has consistently been rated one of the most business friendly states in the nation in independent assessments, including receiving Forbes Magazine’s top-ranking for the last two years. Here in the Commonwealth, we believe that business is the lifeblood of the economy and I am personally committed to making sure we remain welcoming to business owners. …

As you consider your best options for the health of your business, please consider bringing your expertise to the Commonwealth of Virginia. Right here in Fairfax County, we have space in the high-tech Dulles Corridor that is calling your name. I would love to hear from you and connect you with resources for business owners here in Virginia.

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  1. James Atticus Bowden Avatar
    James Atticus Bowden

    Of course taxes matter. When the Dutch taxed houses by their width, number of stairs and rooms – guess how the architecture in Amsterdam changed.

    Check out the data on the economies of Ohio and Virginia since the early 90s. Good comparisons to be made.

    Look at Michigan as an example by itself.

    Rising taxes in Virginia, which kills capital, are mitigated in NoVa and HR/Tidewater by the massive amounts of capital dumped in by the Federal government.

    Dunno how many people make over $750k in Md – to see what effect this particular tax might have.

  2. Larry Gross Avatar
    Larry Gross

    I thought we already had the optimum low-tax model.

    The places with the absolute lowest taxes for the wealthy are 3rd world countries – right?

    If you want to live literally like a king – take your money and move to Somalia or Sudan or any number of hundreds of locations worldwide.

    Ahhh.. you say.. that idea is a little too “rich” for your blood.

    You actually want to be able to do stuff besides hide behind the bars in your windows…and you actually want water & sewer and electricity for that protective fortress…and someone you can trust to fix your Mercedes when it coughs.

    novel concept…

    so.. where’s the list of the lowest tax places for the rich?

    I’d like to know what those places are and whether or not they are in Amsterdam or Angola.

  3. Groveton Avatar
    Groveton

    If Maryland thinks this through –

    1. They should drop the computer service tax.
    2. They should keep the high income tax.

    If the roles were reversed and Virginia was considering this –

    1. I would definitely start planning how I’d move our employess across the river – to Maryland or DC. I might even figure out how to get jobs out of the area altogether. And no, Fredricksburg would not be at the top of my list. No disrespect to F’Burg but Utah, parts of Texas, parts of Oregon, etc. have good skills and are cheaper than F’Burg.

    2. The people I know who make $750,000 or more per year might move. Let’s aim high – a person making $2M per year. Making the simplifying assumption that all the income is taxed at the top marginal rate, our wealthy person would pay $15,000 more in taxes per year. As far as I know, this would still be deductible on Federal taxes so it would work out to $7,500 per year after a Federal deduction which I have assumed (for the sake of simplicity to be 50%). I am happy to have someone give me better numbers here.

    Would people move? Probably not.

    Would newly arrived wealthy people prefer the lower tax state – definitely.

    So, the computer services tax would start an immediate and significant migration.

    The extra tax on the wealthy would start a slow migration that would unfold over time.

    Hurt me now or hurt me later?

    I’ll take later.

  4. Anonymous Avatar
    Anonymous

    I tend to agree that many types of incremental tax increases will not necessarily cause people to move. However, if coupled with a high cost of living and a deteriorating quality of life (as we see in NoVA and Suburban Maryland), people and businesses will begin to move, especially as they see better overall locations. Witness California. Quite a few successful business people have moved from California over time.

    Of course, access to the federal trough will mitigate this phenomenon to some degree. How much? How little?

    TMT

  5. Anonymous Avatar
    Anonymous

    You can get a lot of Zloty’s for a dollar, and live like a prince on your social security in Poland. I think Texas is right up there, along with Costa Rica, Mexico, and seeral other expat havens that have figured out where their bread gets buttered.

    St. Martin, I think has no real estate tax and no income tax. They rely on tourist dollars and tourist fees.

    RH

  6. Groveton Avatar
    Groveton

    “so.. where’s the list of the lowest tax places for the rich?”.

    Big question – what is rich? High income or high net worth or both?

    Once you have high net worth – you are pretty much immune to wringing your hands over taxes.

    You have the net worth to manage your investments for capital gain. That’s 15% capital gains and 5.75% state = 20.75%. Try getting to that rate with ordinary income! And if you don’t want to pay any federal taxes – buy some municipal bonds. And if you don’t want to pay any federal or state taxes – buy munis from your own state.

    Now – if rich means high income, that’s a much more difficult problem. Everybody is taking a bite out of your salary. You can move to Nevada or Texas although you have to earn your money there or the state where you actually earn the money will come after you. And the other taxes are high. So, get rich in Texas then move elsewhere once you are rich.

    However, the best plan is still to either inherit money or marry money. Anything else is too hard.

    Finally, one of my rich friends once told me a secret. He said it was almost impossible to amass $1M in cash (without corresponding debt). However, he said, once you have $1M getting to $10M is almost inevitable.

  7. Anonymous Avatar
    Anonymous

    Do taxes matter? In a vacuum yes, but we don’t live in a vacuum and there are a number of other factors such as location, industrial clusters, workforce availability that have bigger effects than taxes. For the personal income tax usually the job location and salary have a far bigger effect than state income taxes considering they aren’t that big a proportion anyway. For the $1M+ crowd, they will usually be spending a high proportion of income on real estate so location is probably key.

    Looking at the Maslow hierarchy, money only takes care of lower level needs of shelter and food. The higher level needs such as love/social acceptance and self esteem require different conditions besides low taxes. The only ones who move will be those that are obsessed with their finances, but they usually don’t make great neighbors anyway. If you need an example, DC has 9% marginal income tax rates and there are plenty of millionaires living there.

    I agree with Groveton that the income tax will probably have less effect than the computer sales tax, though I imagine the tech tax would probably be passed through much like the sales tax. The tech tax actually brings up a bigger point about inequality of the sales tax being applied based on lobbying ability and not across the board evenly. I guess the IT guys forgot to donate to someones campaign.

    ZS

  8. Anonymous Avatar
    Anonymous

    Energy buys you the ability to do work.

    Money buys you the ability to have others do work for you.

    RH

  9. Storage Fairfax Avatar
    Storage Fairfax

    Found your blog in Technorati.

    Cool Post. I agree $100-a-day in Bangladesh, Thailand, India and the Philippines if filthy rich.

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