Report claiming Rhode Islanders moving out to avoid estate tax is unmoving

Press Statement From Kate Brewster, Executive Director, The Poverty Institute

The most recent census found that Rhode Island’s population grew over the past decade^[1]. So too have the number of wealthy taxpayers, according to information taken directly from federal tax returns^[2].

Despite these facts, a report released today marks yet another attempt to lay the groundwork for more tax cuts for wealthy Rhode Islanders – based on the unproven but undying myth that these taxpayers are “fleeing” for low tax states – in particular, states with no estate tax.

“Leaving Rhode Island” tries – and fails – to show that the estate tax is the most significant driver of out-migration. Yet, absolutely nothing in the report supports this claim and notably, the report does not provide information about the migration patterns of upper-income Rhode Islanders.

Only a handful of Rhode Island taxpayers will ever have an estate that is actually subject to an estate tax, making it highly unlikely that the average Rhode Islander moving to another state is doing so for this reason. In Tax Year 2008, for example, a mere 326 resident estate tax returns were filed^[3]. Warm winters and a robust retirement community are more plausible explanations for moves to Florida and other sunny states like North Carolina and Virginia.

The information put forth about the top destination states of Rhode Islanders is simply wrong. Massachusetts, which also has an estate tax, is the number one destination of migrating Rhode Islanders.^[4]  It is true, however, that the state with the greatest “net” out-migration is Florida – meaning more Rhode Island residents move to Florida than come from the Sunshine State.  But suggesting that this phenomenon is related to the estate tax is undermined by the fact that residents from states with no estate tax like New Hampshire also have Florida as a number one destination for “net” out-migration. Furthermore, of the 16,650 people who moved out of Rhode Island to another state between 2004 and 2005, after Florida repealed its estate tax, more than two-thirds (10,694) moved to states that still had an estate tax.

The report also uses some very flawed assumptions to claim that some $540 million in state and local tax revenue was lost between 1995 and 2007 due to out-migration. This figure is derived by applying Rhode Island’s state and local tax rates to the income reported to be leaving the state with out-migrants, resulting in a seriously overstated amount. This overly simplistic methodology assumes, for example, that property tax revenue will be lost when someone leaves. This is not the case, however, as it is reasonable to assume that the property will be sold and taxes will continue to be paid. The author also uses 1995 as the base year and then compounds the income attached to out-migrants through 2007 which fails to recognize that circumstances change. For example, entering retirement may cause the income of an out-migrant to decline in future years.

Not mentioned in this report are the many careful analyses that have studied the possible connection between estate taxes, migration and the impact on state economies. Serious doubt has been cast on whether the elderly in particular move because of estate taxes. While one study found a small correlation it concluded that any revenue losses resulting from out migration were small compared to the revenue generated through the estate tax itself.   Eliminating an estate tax, therefore, would cause a state’s finances more harm than good.^[5]  Data provided in “Leaving Rhode Island” actually supports this finding.  It claims that the out-migration (allegedly caused by the estate tax) is causing the state to lose an average of $9 million a year in state and local revenue, far less than it collects every year through the estate tax (RI collected $29 million in Tax Year 2010).

There are many other problems with this report. Perhaps the fact that absolutely no data is provided to support the claim that people are “most inclined” to move to states where union membership and population density are low is a perfect example of how short this report is on evidence. It ignores the research that shows that jobs, family and quality of life are more common reasons for inter-state migration.

Wealthy Rhode Islanders have enjoyed a number of tax cuts at both the state and federal level.  This includes the implementation of the flat tax over the past several years and the impending permanent reduction in the top marginal personal income tax rate from 9.9 percent to 5.99 percent. It also includes the recent two-year extension of the Bush tax cuts which are expected to save the top 1 percent of Rhode Island taxpayers $39,000 per year on average.^[6]

We trust that policy makers will not consider any changes to tax policy, including the estate tax, based on this report. If we want to continue to grow our state, we need the resources to fund the public services that matter to residents and businesses: quality education for our current and future workforce, a strong infrastructure, and protections through our public safety and court systems. Additional tax cuts will only further undermine our ability to provide these vital services and strengthen our economy.