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With Rhode Island facing a projected $295-million deficit in the next fiscal year, the last thing we need is to have rich taxpayers fleeing the state.
But the Ocean State Policy Research Institute contends that's exactly what is happening, thanks to Rhode Island's estate tax.
OSPRI, which analyzes policy issues "based on the principles of free enterprise, limited government, and traditional American values," released a report on Jan. 20 asserting that much of the state's wealth is leaving -- mostly for Florida, which no longer has a state estate tax.
"The most significant driver of out-migration is the estate tax, especially considering that the number one destination state for former Rhode Island residents is Florida, a state with no estate tax (or individual income tax)," the report asserted.
The lack of an estate tax is what sends people to Florida? Not the lower overall tax burden, including no income tax? And why not the warmer weather?
Nonetheless, OSPRI contends in its 20-page report that people are fleeing in droves and Rhode Island's estate tax is a big part of that.
We decided to take a look.
First, a bit of background.
Rhode Island's estate tax, sometimes called a "death tax," applies to estates worth over $859,350, a limit indexed to inflation. (There is a proposal in the General Assembly to raise that limit to $1 million.)
The actual tax rate is based on a complicated formula -- isn't it always? -- with a rate that increases as the size of the estate increases. For example, a $1-million estate is taxed at 3.32 percent; a $10-million estate is taxed at 4.98 percent.
The impact, OSPRI contends, has been huge. While the state collected $341.3 million from the tax from 1995 to 2007, OSPRI says the state lost $540 million in other state and local taxes because people left Rhode Island.
The report was paid for by Alan Hassenfeld, a board member and former CEO of toymaker Hasbro, who says he knows high-income people who have left the state, in part because of the estate tax.
The first question is, are more people leaving the state than coming in?
The simple answer is yes. The OSPRI study cites a Census Bureau report showing that from April 1, 2000, to July 1, 2009, Rhode Island's population increased by 4,894. But that was because in-state births far outweighed in-state deaths.
When you look at net migration in and out of the state, we lost 44,649 residents.
The study says it’s the rich who are leaving, but the report makes you wonder.
The adjusted gross income of the average taxpayer leaving the Ocean State from 1996 to 2007 was virtually identical to the income of the taxpayer coming into the state ($45,455 versus $45,742). In 7 out of the 12 years, the income of taxpayers leaving was actually lower than the income for taxpayers coming in.
So if Rhode Island is losing revenue, it's because more taxpayers are departing, not because the emigrants are, on average, wealthier.
The study also says the "migration of income" to Florida -- the top destination for Rhode Islanders leaving the state -- was especially pronounced "in the years after the elimination of Florida's estate tax."
"Between 1995 and 2003, the average income out-migration from Rhode Island to Florida was $84,570,000 annually; whereas in 2004 and beyond the average income out-migration jumped by 77 percent to $149,702,000 annually."
So beginning in 2004, according to the study, the Rhode Island estate tax sent taxable income fleeing to Florida.
But the Florida estate tax was still in effect in 2004.
In addition, the number of taxpayers migrating to Florida increased in the years before that tax was eliminated -- not what you would expect if the estate tax was supposed to be keeping them away.
Not only that, during the first year the tax disappeared, the number of people moving from Rhode Island to Florida dropped by 13.6 percent. The decline continued in 2006 and 2007, the last two years examined by the institute. Once again, not what one might expect if the lack of an estate tax was driving movement to Florida.
And the average income of people moving to Florida from Rhode Island plummeted by 29 percent after the Florida estate tax was eliminated. It rebounded in 2006 but by 2007, it was 36 percent lower than when the estate tax was in effect.
J. Scott Moody, the author of the report and a tax policy economist, offered an explanation.
Moody said the rich were moving to Florida in record numbers while the estate tax was still in place in anticipation of its disappearance in 2005. "Moving is not an instantaneous process," he said. "You have to prove you changed domicile and move all your relationships to Florida. That's usually a yearlong process."
And once the tax was gone, he said, movement to the state began the steady decline because the rich knew Florida's estate tax was scheduled to reappear in 2010. (It didn't happen.) Thus, his analysis lumped 2004 into the no-Florida-estate-tax category even though the tax was still in effect.
We asked Moody if any published study documented this type of anticipatory behavior when it comes to the estate tax. He said he didn't know of any but predicted that it would be proven in the coming years.
We have other reasons for skepticism.
Moody's study makes an attempt to gauge the different factors that send Rhode Islanders to other parts of the country. It ranks the estate tax at the top; population density is second, and lower income taxes is virtually tied for third place with -- and this struck as particularly odd -- the amount of union membership.
It doesn't prove that people are migrating to a state for a specific reason, Moody said, "but people vote with their feet."
OSPRI's director of policy and organizing, William J. Felkner, who has called for eliminating the estate tax, was even more direct: "There's no doubt that the estate tax is the most influential."
The OSPRI study cites just one scholarly report, coauthored by Moody himself: "The County-to-County Migration of Taxpayers and Their Incomes, 1995 to 2006" by The Center for Applied Economics at the University of Kansas School of Business. The paper mentions estate taxes only twice, citing other studies. One of those studies says estate taxes can "generate out-migration of wealth." In contrast, the other found that such taxes "appear to exercise no significant influence over state migration patterns."
Outside experts we consulted had doubts of their own.
One expert was Kail Padquitt, staff economist for The Tax Foundation, a think tank that studies federal and state tax policies, who said he hasn’t seen any proof that the prospect of paying estate taxes drives people to move.
"You can see people are leaving a state, but (determining) why they are leaving is hard," Padquitt said. "Florida has sunshine, low taxes and warmth. Why wouldn’t people move there?"
In 2006, the National Tax Journal published "State ‘Death’ Taxes and Elderly Migration -- The Chicken or the Egg?" The authors, Karen Smith Conway of the University of New Hampshire and Jonathan C. Rork of Vassar College, found no evidence that the elderly are responding to changes in estate taxes.
"We overwhelmingly find no effect of estate taxes once you look over time," Conway told us in an e-mail.
Moody said he was unaware of the study.
* IRS data cited by OSPRI shows that Florida was increasingly attractive to Rhode Island taxpayers in the years when it had an estate tax. The flow slacked off significantly when the tax was eliminated. That runs contrary to the trend OSPRI claims to have proven.
* OSPRI tries to support its argument by including a year when the tax was still in place. We do not find Moody's "anticipatory moving" explanation persuasive.
* OSPRI does not mention other scholarly research reporting that the estate tax has little or no impact on the flow of people from one state to another.
Are some of the people moving from Rhode Island because of the estate tax? Probably.
Is it "the most significant driver" as OSPRI claims? They could not prove their case.
We rule their claim False.
OceanStatePolicy.org, "Leaving Rhode Island," Jan. 20, 2011, accessed Jan. 30, 2011
Interviews and e-mail, James Cambio, chief of estate taxes, R.I. Division of Taxation, Feb. 3, 10 and 11, 2011
ProJo.com, "Estate tax driving rich out of R.I. — Hassenfeld," Jan. 20, 2011
Census.gov, "Table 4. Cumulative Estimates of the Components of Resident Population Change for the United States, Regions, States and Puerto Rico: April 1, 2000 to July 1, 2009," accessed Feb. 3, 2011
TaxFoundation.org, "Florida: The Facts on Florida's tax climate," accessed Jan. 31, 2011
TaxFoundation.org, "Rhode Island: The Facts on Florida's tax climate," accessed Jan. 31, 2011
Bureau of Labor Statistics, "Consumer Price Index 1913-2010," accessed Jan. 31, 2011
Bureau of Labor Statistics, "CPI Inflation Calculator," accessed Jan. 31, 2011
Interview and e-mail, Scott Moody, economist, Ocean State Policy Research Institute, Feb. 4, 9 and 11, 2011
Interview, Kail Padquitt, staff economist, The Tax Foundation, Jan. 27, 2011
Estate Tax, www.irs.gov
The Center for Applied Economics, "The County-to-County Migration of Taxpayers and Their Incomes, 1995-2006," accessed Feb. 1, 2011.
Research Papers in Economics, "Do the Rich Flee from High State Taxes? Evidence from Federal Tax Returns," accessed Jan. 31, 2011
E-mail, John Bakija, economist, Williams College, Jan. 31, 2011
Research Papers in Economics, "State 'Death' Taxes and Elderly Migration -- The Chicken or the Egg?" accessed Feb. 1, 2011
E-mail, Karen Smith Conway, Feb. 1, 2011
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