[ In 2022 the voters in Massachusetts enacted a special tax on
millionaires. During that campaign and after, the supporters of
millionaires have flooded airwaves with storied of "rich people"
fleeing Massachusetts.]
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DEBUNKING THE FIVE MAJOR MYTHS ABOUT OUTMIGRATION  
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Kurt Wise
June 14, 2023
Massachusetts Budget and Policy Center
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_ In 2022 the voters in Massachusetts enacted a special tax on
millionaires. During that campaign and after, the supporters of
millionaires have flooded airwaves with storied of "rich people"
fleeing Massachusetts. _

, Massachusetts Jobs with Justice

 

Recently, multiple news articles, op-eds, and think tank reports have
asserted that Massachusetts is suffering an exodus of households,
particularly high-income households, fleeing to states with lower
taxes. A closely related claim is that outmigrants are taking billions
of dollars out of the Massachusetts economy when they leave. THESE
CLAIMS ABOUT INCOME MIGRATION ARE BOTH OVERBLOWN
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AND BASED ON A FUNDAMENTAL MISUNDERSTANDING OF THE AVAILABLE DATA.

The scary portrayals of population flight are typically connected to
calls for tax cuts that overwhelmingly would benefit the wealthiest
households. This is illogical given that high-income households are
departing Massachusetts at lower rates than other households.
Moreover, evidence shows taxes have only a very limited impact on the
decisions of high-income households as to where to live. Worse still,
the proposed tax cuts would result in the loss of hundreds of millions
annually in state tax revenue, significantly impeding the
Commonwealth’s ability to address the real challenges that are
pushing some households to leave. These challenges include the
affordability of housing, childcare, and higher education, and the
ongoing deterioration of our transportation systems.

Available data do not show an exodus of households from Massachusetts

First and foremost, the available IRS and Census data suggest that
while outmigration and population growth are issues worthy of
policymakers’ attention, Massachusetts is not facing an immediate
crisis. The most recent IRS Statistics of Income data (2020-2021)
indicates that Massachusetts saw a net decline of less than 1 percent
in the number of tax returns from the prior year. This is a larger
year-to-year decline than seen in the prior several years, but the
COVID pandemic had major impacts on migration patterns throughout the
US during 2020 and more current years.

More recent U.S. Census Bureau data from July 2021 through July 2022
show a net population decline in Massachusetts of just 7,700 people
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for the entire 12-month period. This is about one-tenth of one percent
of the total Massachusetts population. While these data should place
migration issues on the radar of policymakers, there is time to study
and understand which trends are temporary pandemic-response behavior
versus which trends may be longer-term. Policymakers can then
determine the causes and then design and implement effective
solutions.

The data also do not show an exodus of income from Massachusetts

It is erroneous to assert that IRS Statistics of Income (SOI) data
show Massachusetts is “losing” several billion dollars a year in
Adjusted Gross Income (AGI) from its economy as households leave
Massachusetts. This error arises from a fundamental misunderstanding
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of how to interpret properly the IRS’ use of the AGI measure. As
Lyman Stone, a tax analyst who has worked at the conservative Tax
Foundation, has written
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“It is common for migration commentators to treat the AGI of IRS SOI
migrants as ‘migration of money.’ This is an egregiously wrong use
of the data…(T)hose who read the data this way have either failed to
perform the most basic due diligence of looking at the (IRS SOI)
manual, or else actively mislead their readers.”

In fact, the IRS Statistics of Income (SOI) data
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tell us nothing definitive about how much income follows outmigrants
when they leave a state nor how much income arrives with in-migrants.
Here’s why:

* For most people, their AGI (essentially, their taxable income) is
composed of their wage and salary income, which is tied directly to
the job they perform. When a restaurant worker, police officer,
doctor, realtor, teacher or nurse decides to move to another state,
they do not take their job with them. The job remains in the state of
origin and a new worker will fill that position, collecting the income
the departing worker had been earning prior to their move. Total
in-state AGI remains largely unaffected by this type of natural churn
in the make-up of the workforce.
* For people whose income derives from owning and operating a
business – as opposed to wage and salary income – typically, they
take little if any of this business income with them when they move.
If a self-employed carpenter, dentist, lawyer, or restaurant owner
departs, the demand for the services they provided remains. Some
departing owners will sell their business to new owners who will
continue to generate that same income previously earned by the
original owner. Some businesses may close when their owners leave, but
the customers will remain. Existing businesses will expand to meet the
ongoing demand. In the process, these existing businesses will capture
much, or all, of the income formerly earned by owners that move out of
state. The overall state economy will go largely unaffected.
* Importantly, as far as state tax collections are concerned, income
derived from Massachusetts-based economic activity typically is
taxable by the Commonwealth, regardless of where the recipient of this
income resides
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Workers that commute physically from a neighboring state to work in
Massachusetts are subject to our state income tax on the portion of
their income earned in Massachusetts. Even for people who may
“telecommute” from out of state some of the time, if their job is
in Massachusetts and they periodically work in-state, their
Massachusetts-based income is taxable by the Commonwealth.
* In general, there are only two kinds of income that leave a
state’s economy when out-migrants depart. The first is investment
income – for example, dividend and interest income, and income from
the sale of stocks, bonds, and other assets. However, most
outmigrants, like most people, earn little or nothing from
investments. Typically, it is only high-income households that
generate any significant amount of income from investments. The IRS
data show that less than 17 percent of Massachusetts AGI came from
such sources in Tax Year 2020
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most recent year for which such data are available). For high-income
households as a group (those with incomes above $200,000), investment
income in 2020 provided 28 percent of total AGI.
* The second form of income that departs a state’s economy when
people move out-of-state is retirement income in the form of Social
Security payments or payments from other private or governmental
pension plans or annuities. While these dollars travel with
out-migrants when they depart, IRS data show that only 9 percent of
total Massachusetts AGI came from Social Security, pensions and
annuities, and individual retirement plans combined. In any case,
there are a limited number of policy levers that will affect the
migration decisions of retirees. Some retirees inevitably will choose
to leave Massachusetts for warmer climates, bigger mountains, or to be
nearer to kids, grandkids and other family. As with other age groups,
however, there is no exodus of older households. The most recent
2020-2021 IRS data show that less than 11,000 such households departed
during this period, while 8,500 such households migrated to
Massachusetts from out of state, replacing close to 80 percent of
outmigrant households age 65 and above. With a population of over 7
million people, this level of net out-migration among retirees is
neither surprising nor cause for undue alarm.
* Calls of alarm about outmigration and an associated, large loss of
income from the state economy have pointed to IRS data on AGI to
support these claims. This is a misuse of the IRS data. The data do
not and cannot support such claims. For the reasons outlined above,
any actual departure of income from the Massachusetts economy due to
outmigration is a fraction of the IRS’ net AGI outflow figure. The
IRS data do tell us that Massachusetts’ AGI, adjusted for inflation,
has grown by a third (33.4 percent) – or almost $100 billion dollars
– from 2011 through 2020 (the most recent 10-year period for which
IRS SOI total state AGI data are available).

High-Income households do not have higher rates of outmigration in
Massachusetts

Instead of starting with the assumption that high-income households
are at the center of any outmigration challenges Massachusetts may
face, we should start with the data. The highest income group broken
out in the IRS migration data is households with annual income over
$200,000. A forthcoming review of the IRS data from 2011-2021
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Center on Budget and Policy Priorities [[link removed]] looks
at the average annual rate of outmigration for this group during the
most recent ten years. MASSACHUSETTS FARES BETTER THAN MOST OTHER
STATES, WITH A LOWER RATE THAN 38 OTHER STATES, INCLUDING NEW
HAMPSHIRE AND FLORIDA, AS WELL AS MOST OTHER STATES WITH NO STATE
INCOME TAX.

Tax cuts will not change where most high-income and wealthy households
choose to live

The most thorough research
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shows clearly that when it comes to decisions about where to live,
most very high-income households are unresponsive to state tax rates,
flawed counter-claims notwithstanding
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High-income households typically are “embedded elites”, having
achieved economic success in the place where they live. They also tend
to be in demographic groups that are must less likely to move
out-of-state; they are married, have children, and are in their peak
earning years. Overwhelmingly, very high-income people choose to live
where they want to live and where they have built successful careers
or businesses, not where state taxes (and, by consequence, state
services and amenities) are lowest.

Tax cuts for high-income households are not “cost free” – the
loss of tax revenue prevents the Commonwealth from addressing real
problems

Massachusetts does have a problem with the affordability of housing,
childcare, higher education and more, as well as a longstanding
problem with deteriorating transportation infrastructure. These
problems present significant challenges for many Massachusetts
households. They push some households to leave and discourage others
from coming. It is these challenges that the Commonwealth must address
if lawmakers decide to prioritize reversing the trend of modest
outmigration. Addressing these challenges will be possible only if the
Commonwealth has sufficient revenue to make substantial, ongoing
investments. Providing a new round of large tax cuts to the very
highest-income and wealthiest households will undermine, not support,
such efforts.

Calls to stem outmigration by cutting taxes for high-income and
wealthy households misdiagnoses the scale and nature of the problem,
promotes a “solution” that in any case would do very little to
change residency decisions, and which would have the perverse effect
of limiting the Commonwealth’s ability to address real problems that
the people of Massachusetts do face.

* tax the rich
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