Editor’s Note: Also see the next post, comparing income taxes across all 50 states.

No joke: the wealthy disproportionately choose to live in states with income taxes.



The states with the highest concentrations of wealthy households all have income tax rates. (In fact, the rates are much higher than what Initiative 1098 proposes for Washington.) Wealthy households—defined here as owning more than $1 million in liquid investable assets, not including real estate—do not appear to be be fleeing states with income taxes. Just the opposite, in fact: they appear to be flocking.

To illustrate the point, here’s a look at tax rates in the states with the highest concentrations of wealthy households. I added in Washington under 1098 for comparison purposes.

(Full size image here.)

I think there are a couple of ways you could parse this.

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First off, it’s clear that the New York City and Washington, DC metropolitan areas are major attractors of wealth. In fact, DC and Delaware rank 10th and 11th, respectively, while New York State ranks 12th in wealthy households per capita—and each of these states have relatively high income taxes. What’s interesting is that state income taxes don’t appear to be undermining the economic dynamism of NYC and DC, at least not as measured by the presence of wealthy households. In fact, you could be forgiven for thinking the reverse is true.

One explanation, maybe, is that while the wealthy may not enjoy paying taxes (who does?), they do like the return on the investment. After all, if you can choose where to live, it seems sensible to want to be in a place with good schools, healthy social conditions, well-functioning transportation systems, robust law enforcement, environmental regulation, and so on. So perhaps the rich treat paying for quality of life with an income tax as a good buy. (It’s certainly easy to imagine that’s the case with residents of Hawaii.)

Yet I suspect that’s not the full story. There are likely dozens of other factors at work, such as the ability of states to generate wealth, regional economic disparities, historical accidents, and more. During the next few weeks, I’ll dig into state income tax comparisons. We’ll see what comes to light.

Thoughts? Questions? Ideas?

Leave ’em in comments please!

Postscript 8/18/10: Here’s a more complete look at the effective income tax rates in these states:

(See full size version here.)

Notes: States in the chart are rank ordered left to right according to the number of households per capita that own more than $1 million in liquid investable assets, not including real estate, as determined by Phoenix Marketing International’s analysis for 2009, here. The tax rates are calculated by Sightline based on data from the Tax Foundation, here. Rates do not include the very modest personal exemptions or standard deductions provided by some states, nor do they include state-authorized local income taxes in Maryland and New Jersey.