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By: Mark Glennon*

One person’s move from New Jersey to Florida for tax reasons had New Jersey leader’s “freaking out” this month, according to the Associated Press. It should have Illinois’ leaders freaking out, too, along with anybody concerned about inequality, which should be all of us.

. “We may be facing an unusual degree of income-tax forecast risk,” this year, said a budget official there, citing Tepper’s planned move as prime cause for concern.

Where the story gets interesting is the interplay with inequality, and Fortune had a particularly thoughtful article on that. “New Jersey’s tax problem is just a more extreme version of what many state and local governments will have to contend with as growing income inequality slows economic growth and shrinks tax bases,” wrote Fortune. Citing a report from Standard & Poor’s, they said state tax revenue has become more volatile as progressive tax states have come to rely more heavily on capital gains from top earners. Further, the pace of revenue growth is declining and disparity in income is contributing to lower tax revenue growth by weakening the rate of overall economic expansion. They conclude:

This trend will not make life easier for either side of the debate over taxes. Those who think the rich are already taxed too much must confront the fact that the wealthy are the only group in the country who are consistently seeing their income rise. Those who want to tax the rich more will have to deal with wealthy’s ability to flee liberal, wealthy states like New Jersey for places with a smaller government ethos.

In Illinois, meanwhile, debate began on a graduated income tax that would eliminate the flat individual rate of 3.75% and take take top rates up to 9.75% on incomes over $1.5 million. At the same time, the accelerating exodus from Illinois, particularly of the wealthy, finally got headlines. One study recently released showed Chicago among the four cities in the world with the largest exodus of millionaires.

Let’s start with the obvious, an put it flippantly: Driving the wealthy out of Illinois is no way to reduce inequality in the state. Nobody should worry much about helping the very wealthy just for the sake of that, but we should worry about keeping them productive and engaged — here.

Progressives dismiss the flight problem, especially in Illinois because the current flat rate is relatively low for the wealthy. Slate even sneered off the importance of Tepper’s move with this astonishing comment:

 

This is mostly a convenient anecdote about modern inequality. (No one man should have all that power … over a state’s revenue forecast). I would avoid reading too much into it as a parable about the dangers of progressive taxation on the state level, however, given that there’s little evidence that state tax rates have much influence on where Americans typically move.

 

That’s nuts. The combined tax burden in Illinois unquestionably is one major factor pushing the wealthy to flee or change residence, as we’ve written here for several years. Yes, no one man should have that much power over a state’s revenue forecast. That’s the problem. That’s the point.

Illinois doesn’t rely as heavily on mega-taxpayers as New Jersey does because our current flat rate is less than half of New Jersey’s top progressive rate, so, in one sense, we don’t have its problem to the same degree. But even in flat tax Illinois, the contribution of the wealthy to tax yield is surprisingly large, and running them off hurts. The top 1% percent of Illinois tax returns paid 20% of the state income taxes in 2013, and those who reported AGI of $100,000 per year or more, the top 18 percent of Illinoisans, covered 63 percent of all income taxes. (2013 is the most recent year that data is available, and the Illinois rate was temporarily at 5% then.)

There’s a different reason why Illinois and Chicago are particularly at risk for the kind of losses New Jersey faces with Tepper’s departure. Aside from all the other problems spooking the wealthy, we face this: Rick Scott. Florida Governor Rick Scott has a determined campaign underway to lure financial firms of all kinds to Florida, and he’s just the guy to pull it off. I used to know Scott quite well. He was a law partner of mine and we worked closely together often in the 1980s. Think what you want about his politics, but he’s the hardest working person I’ve ever known and extremely sophisticated financially. He knows how to push the right buttons to recruit financial firms. (I thought about contacting him for a comment, but decided I better not give him a chance to make his sales pitch.)

If he sets his sights on raiding Chicago he will have plenty of valuable targets. Hedge funds, private equity and similar firms are among the things working well here. They are golden geese. Chicago has about 200 hedge funds, including Citadel and Magnetar. Together, those two alone have over $40 billion under management. Chicago has been listed as the third best city in the world for hedge fund jobs. Citadel’s founder, Ken Griffin, is reportedly worth $7 billion and made $1.7 billion last year. He is also a major philanthropic force. His departure alone would be a blow.

The interplay with inequality is where it gets more complicated. Migration to low tax states will only worsen inequality on a national level. And reliable funding for education, safety nets and other basic government services demands a reliable income stream. But heavy reliance on the wealthy is dangerously volatile, as Standard & Poor’s concluded in that study cited by Fortune, because their income is heavily comprised of capital gains.

Inequality is real, and it’s among the biggest challenges of our age. The causes and solutions are exceptionally complex, and I certainly don’t claim to know them all, but this much is clear: Addressing it now in Illinois through highly progressive tax rates at the state level is a simplistic fool’s game that will backfire on Illinois, given its unsolved problems that are worse than New Jersey’s and already driving large taxpayers out. If somehow we fix all those other problems, a progressive tax of some form would be fair and acceptable to the wealthy. Until then, moving towards New Jersey’s model won’t work.

*Mark Glennon is founder of WirePoints. Opinions expressed are his own.

 

 

 

 

 

 

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