Does the additional revenue that comes from a tax increase get cancelled out, in whole or in part, because taxpayers — especially high earners — leave or change their residence?
Astonishingly, nobody in Illinois government has attempted to answer these questions and the state has no data, no study, no clue. I’ve asked several legislators from both parties and searched myself, but nothing is there.
The anecdotal evidence says the problem is severe. Examples are reported publicly fairly often. Tax planners say changes of claimed residency are now shooting up. A partner at a major Chicago law firm told me his trust & estates department has been swamped redoing estate plans to change residences out of Illinois. A wealthy investor in an exclusive condo told me “everybody in my building” is changing residence for tax reasons. Exaggeration perhaps, but do we know?
The closest we have is an earlier study done by the Illinois Policy Institute, a libertarian think tank, which showed taxpayers fleeing before the 66% “temporary” increase in tax rates that went in place in 2011. It said:
In 2009 alone, Illinois lost residents who took with them a net of $1.5 billion in taxable income. From 1995 to 2009, Illinois lost out on a net of $26 billion in taxable income to out-migration.
But what we obviously need is a more recent study that shows the effects of that 66% tax increase. Have taxpayers already been moving or changing residence in response to the 2011 tax increase?
Think maybe the state hasn’t asked because they don’t want to hear the answers?
The issue is especially important as it relates to wealthier taxpayers. They pay the lion’s share of taxes and they will be asked to pay proportionately more as proposals advance for a progressive income tax in Illinois. They also comprise the angel investors fueling our startup community — one of the few good things going in Illinois. Many of those one percenters have second homes in Florida or elsewhere and can easily change their residence, or they are financially independent and can just move.
Conducting a good study to see the effects of the 2011 tax increase should be fairly easy. Anonymized tax return data from the IRS can be obtained and changes in zip codes of taxpayers will tell the story.
Suppose you own a store and you’ve hired somebody to manage it. Suppose the manager tells you he raised his prices and is getting more revenue per sale. Would you ask if the price increase drove off any customers resulting in fewer sales, and how it netted out? If your manager is an Illinois legislator, don’t expect him to be thinking in those terms.