Wall Street Journal Chimes in Against the Estate Tax

A recent lead editorial in the Wall Street Journal chimes in against the estate tax. More importantly, at least from my perspective, they cited my recent Rhode Island migration study in their editorial.  Here is what they had to say:

New research indicates that high state death taxes may be financially self-defeating. A 2011 study by the Ocean State Policy Research Institute, a think tank in Rhode Island, examined Census Bureau migration data and discovered that “from 1995 to 2007 Rhode Island collected $341.3 million from the estate tax while it lost $540 million in other taxes due to out-migration.”

Not all of those people left because of taxes, but the study found evidence that “the most significant driver of out-migration is the estate tax.” After Florida eliminated its estate tax in 2004, there was a significant acceleration of exiles from Rhode Island to Florida . . .

Proponents argue that the death tax has minimal incentive effects because people can’t change their behavior after they die. But every day people make decisions to minimize their tax bills before they die. In other words, estate taxes don’t redistribute income among taxpayers. They redistribute income among states.

Unfortunately, the federal estate comes back in 2012 including the state “pick-up” tax which creates a huge financial incentive for states to adopt their own estate tax.  If we return to a pre-2001 estate tax world, then this new found tax competition between the states will end.  Even if the federal estate tax comes back, federal lawmakers should make sure that the “pick-up” tax never comes back–the federal government should not be in the business of encouraging states to have certain types of taxes.  The U.S. is a federal system . . . or at least use to be.

In the meantime, if you live in one of these states and possess significant assets . . . you may want to get out.

States of Confiscation

Taxes Matter V: Illinois Taxpayers Flee State

Today the Illinois Policy Institute released my study on the migration of people and income out of Illinois: “Leaving Illinois: An Exodus of People and Money.” (pdf)  Here is the Executive Summary:

Migration between the U.S. states is the ultimate expression of “voting with your feet.” People move for many reasons, but, when examined en masse, it’s clear that public policy significantly influences where people choose to live. This study undertakes a thorough examination of Illinois’s migration patterns to better understand progress on important public policy issues. Key findings include:

  • Illinois lost a net of 1,227,347 residents to other states between 1991 and 2009, or slightly more than one resident (1.22) every 10 minutes.
  • The top states that people from Illinois move to are Florida, Indiana, Wisconsin, Arizona and Texas.
  • Illinois lost 86,021 taxpayers between 1995-2007 to its border states: Wisconsin, Indiana, Iowa, Missouri and Kentucky. This represents $4.1 billion in lost Adjusted Gross Income (AGI) and $26.8 billion in cumulative AGI loss.
  • Illinois lost people and taxpayers to 40 states and the District of Columbia, and Illinois lost net income to 42 states and the District of Columbia.
  • The total net income leaving the state averaged over $1.8 billion between 1995 and 2007 with a total loss of $23.5 billion. Had this income stayed in Illinois, state and local governments would have collected an estimated $2.4 billion in additional tax revenue.
  • When a resident moves out of Illinois, the state doesn’t just lose income and taxes for that one year; rather, the state loses any income and taxes that resident would have generated for all future years. Compounding these figures over the 13 years assessed in this study – without adjusting for inflation – the state has lost $163.6 billion in net income and $16.9 billion in state and local tax revenue due to out-migration.
  • People move from Illinois to states with lower taxes (especially estate taxes), lower union membership, lower population density, lower housing costs and warmer weather.
  • The most significant driver of out-migration, on a percentage basis, is the estate tax. This is especially important considering that the number one destination state for former Illinois residents is Florida, a state with no estate tax (or individual income tax).

Conclusion: Without action, out-migration will continue to reduce the ability of both the private and public sectors to ensure Illinois’s economy becomes strong and vibrant.

In breaking news, the Wall Street Journal reports that Illinois Legislature just passed an enormous tax hike raising the individual income tax rate from 3 percent to 5 percent and the corporate income tax rate from 4.8 percent o 7 percent.  If you think the exodus from Illinois was bad in the past, this tax hike is going to send the exodus into over-drive . . . especially the out-migration of income which is more mobile than people.

Update: The Tax Foundation weighs in as well on the Illinois tax hike . . . in their State Business Tax Climate Index Illinois falls from 23rd to 36th, that’s quite a fall.