Shocker: Wealthy Americans tend to flee high-income tax states

In another demonstration of real-world unintended consequences, a new academic study makes a strong case that when it comes to state-level income taxes, too much can be a bad thing.

The analysis spanning 110 years of income tax history in the United States, which was published in the American Economic Journal: Economic Policy, suggests a correlation between state income tax levels and the migration patterns of affluent Americans.

While taxmen may focus on higher-income earners in a bid to raise revenue equitably, the researchers uncovered a trend of higher earners relocating to states boasting lower or nonexistent income taxes.

The first-ever examination of state-level tax policies between 1900 and 2010, which also analyzed US census data sets, showed that states that boosted income taxes saw per capita revenue increases of between 12 percent and 17 percent. However, these gains did not translate into higher total government revenues as a result of the out-migration of wealthy citizens in the aftermath of World War II.

"Personal income tax means a tax upon labor income, first introduced for the purpose of redistribution of wealth," said Ugo Antonio Troiano, one of the report's co-authors, an economist and associate professor at the University of California, Riverside, who specializes in economics and politics.

The study found many wealthy Americans did not stand for higher taxation, instead using their higher incomes to move to more tax-friendly jurisdictions.

Compared to migrations between European countries, Troiano cited several factors that grease the wheels of mobility within the US, mainly the use of English from coast to coast. Interestingly, the trend of out-migration began to taper off in the 1980s.

State income taxes in the US had a rocky start, with pre-World War II attempts to introduce them facing legal challenges in Pennsylvania and other states. At present, there are six holdout states that have not introduced permanent individual income taxes, including Texas, Florida, Nevada, Washington, Wyoming, and South Dakota.

Troiano said the fact that wealthier Americans pack up and leave when income taxes get too high, but stay put when income tax hikes were minimal, offers a lesson to policymakers looking to adopt progressive tax measures.

"Raising taxes too much might backfire, as the state might lose too many relatively wealthy contributors," he said.