Risky business: States tax the rich at their peril

[September 28, 2009]  ALBANY, N.Y. (AP) -- This year, New York's deep-pocketed rich were required to dig even deeper to help shore up state finances.

They now pay higher taxes on their income and on limousines and yachts, more to enter a horse in a race and more to dabble in real estate. Meanwhile, many are losing millions from the closing of business tax loopholes and those making over $1 million are losing tax deductions others get.

It even costs more to hunt foxes or pheasants and have their taxes prepared.

Now, a half-dozen states in this recession-driven movement are nervously eyeing New York to see if it's wise to demand so much from people rich enough to have a second home in less taxing states -- and for whom a change of address can be its own tax break.

Early data from New York show the higher tax rates for the wealthy have yielded lower-than-expected state wealth. Gov. David Paterson, who had always warned targeting the rich could backfire, fears that's just what happened.

Paterson said last week that revenues from the income tax increases and other taxes enacted in April are running about 20 percent less than anticipated.

The concern about millionaire flight has prompted some states, including New York, New Jersey and California, to increase the highest tax rates only temporarily. For New York, it's the second temporary increase for high earners since 2001.

The first one ended as scheduled after three years. But Paterson and economists warn that came as the economy began to grow fast into another boom, something that isn't expected now because Wall Street -- which historically provided 20 percent of state revenues -- is perhaps permanently downsized.

"People aren't wedded to a geographic place as they once were. It's a different world," said New York Lt. Gov. Richard Ravitch. He said last year's surcharge on income taxes, set to last three years, won't likely meet expectations.

So far this year, half of about $1 billion in expected revenue from New York's 100 richest taxpayers is missing. The state budget office says losses suffered in the recession could be largely to blame, and it may still come in next year when filers exhaust their extensions.

Those seeking extensions nevertheless had to pay in April at least as much as they owed in 2008. The six-month extension for the balance ends in October, but given the hard times many filers likely didn't earn much more than a year ago.

State officials say they don't know how much of the missing revenue is because any wealthy New Yorkers simply left.

But at least two high-profile defectors have sounded off on the tax changes: Buffalo Sabres owner Tom Golisano, the billionaire who ran for governor three times and who was paying $13,000 a day in New York income taxes, and radio talk-show host Rush Limbaugh. Golisano changed his official address to Florida, and Limbaugh, who also has a Florida home, announced earlier this year that he was relinquishing his home in Manhattan.

Donald Trump told Fox News earlier this year that several of his millionaire friends were talking about leaving the state over the latest taxes.

Golisano, who created 5,000 jobs from his Rochester payroll processing company, Paychex, bristled when politicians said he was bailing on New York in the spring.

"If anything, New York state has bailed out on us," he said.

And it's not just the well-known leaving.

Nancy Bell is moving her Science First manufacturer of scientific products from the Buffalo site her father founded in 1960 to Florida, which aggressively courted her and her two business-partner sons. They are building a new facility there and, with the state's help, had 1,000 applications for 20 jobs.

"It was the higher tax brackets, the so-called millionaire's tax" that forced the move, she said. "We feel we have to look to the future ... I'm leaving wonderful, wonderful friends. It's not our first choice. It's our 100th."

Maryland enacted higher tax rates for wealthier residents in 2008 to boost revenues but income from those taxes is down 6.7 percent so far this year. Officials in Maryland, as in New York, hope much of the revenue is simply delayed because of filers' extensions, however.

"Overall, as in most states, revenues are down at the higher income levels," said Joseph Shapiro, spokesman for the Maryland Comptroller's Office. He said there's no concern yet that the higher tax rates on the wealthy are driving the rich out.

The approach has been tried before.

The conservative-leaning Tax Foundation said that through the early 1990s, several states maintained double-digit income tax rates for the higher earners. Those rates were dropped, however, in the boom of a fast-growing economy.

States also realized that having a higher tax rate than their neighbors would cost them talent, lose jobs and hinder economic growth, the foundation reported in May after Hawaii joined Maryland, New Jersey, California and New York to adopt a "millionaire's tax." New York, for example, has been careful not to raise its highest rates above New Jersey's, according to the foundation.

The trend toward hitting up the rich is re-emerging because states want to avoid spending cuts or assume that revenues will always grow in the long term, the foundation said. The result is a reliance on a volatile tax source that can contribute to more boom-and-bust cycles, even if revenue from the rich rises in the short term before high earners find a way to avoid or limit taxation.

The foundation said the taxes can undermine growth, and notes even states that increased taxes on high-income earners -- New Jersey, Maryland, and California -- face shortfalls comparatively worse than others.

In May, the most recent calculation available, Maryland reported that taxes collected from top earners fell by about $100 million. The number of Marylanders with more than $1 million in taxable income who filed by the end of April fell by one-third, to about 2,000.

Often pushed as a "fair tax" measure and backed by public worker unions, pinching the rich could backfire.

"You can say, 'The millionaire is evil,' but they don't just put their money in a coffee can," said Christopher Summers, president of the nonpartisan Maryland Public Policy Institute. "They employ people ... That fact is, you need rich people to keep working hard so they will invest."

[Associated Press; By MICHAEL GORMLEY]

AP writers Brian Witte in Annapolis, Md., and Susan Haigh in Hartford, Conn., contributed to this report.

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