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Amy Traub

New Revenue vs. the “New Normal”

Budget shortfalls have left American cities and states stuck with a “new normal” insists the conventional wisdom. Citizens must accept the hardships that come with longer fire department response times, dirtier streets, lost transit service, shuttered libraries, locked up parks, and more crowded classrooms – there’s no alternative. In the aftermath of the Great Recession, the money simply isn’t out there to meet residents’ needs for basic public services. Granted, we have tremendous and growing inequality, with the top ten percent of families receiving nearly half of the nation’s income and with more than a fifth of all U.S. income going to the top 1 percent, but that’s irrelevant. If those very fortunate residents were asked contribute more to keep their communities afloat, they’d instantly flee the city or state. So the argument goes.

The reality looks a bit different. New research refutes the idea that wealthy residents are abandoning the states that tax them highly. In fact, the states the most millionaires per capita were also among those with the highest marginal income tax rates.

The Wall Street Journal’s Robert Frank notes:

This isn’t to say that taxes don’t matter to the wealthy. They do. A lot. Some states with very low marginal income tax rates, such as Connecticut and Alaska, also ranked high on the density list.

But there are lots of other economic factors at work in the millionaire state counts. And that’s the point. When it comes to creating and retaining wealth, the health of state economies and work-force skill levels seem to matter much more than state tax rates.

Frank quotes David Thompson from the organization conducting the millionaire study, who adds “in general, most high-net-worth households don’t base their living decision on tax rates, but on things like quality of life, access to good education, infrastructure and culture.”

Yet all of these benefits, from culture to a skilled workforce, take public resources to generate and maintain. The data suggests that those individuals with the most resources might not be as averse to chipping in for their communities as the conventional wisdom suggests.

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Posted at 8:22 AM, Oct 07, 2010 in Tax Policy | public services
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