This is what happens when a tax agency is dumb enough to use of a static revenue model:
Maryland couldn’t balance its budget last year, so the state tried to close the shortfall by fleecing the wealthy. Politicians in Annapolis created a millionaire tax bracket, raising the top marginal income-tax rate to 6.25%. And because cities such as Baltimore and Bethesda also impose income taxes, the state-local tax rate can go as high as 9.45%. Governor Martin O’Malley, a dedicated class warrior, declared that these richest 0.3% of filers were “willing and able to pay their fair share.” The Baltimore Sun predicted the rich would “grin and bear it.”
One year later, nobody’s grinning. One-third of the millionaires have disappeared from Maryland tax rolls. In 2008 roughly 3,000 million-dollar income tax returns were filed by the end of April. This year there were 2,000, which the state comptroller’s office concedes is a “substantial decline.” On those missing returns, the government collects 6.25% of nothing. Instead of the state coffers gaining the extra $106 million the politicians predicted, millionaires paid $100 million less in taxes than they did last year — even at higher rates.
About seven years ago, the St. Paul Pioneer Press ran a three-day series on why Minnesota lacked a generation of startups to replace the giants of the 1950s. Three days, and they never so much as mentioned the high tax rates there… even though I knew of dozens of successful businessmen with Minnesota roots who had moved away once they got their companies rolling, did the math, and realized that their savings in state tax alone could pay for their new house in Florida or Arizona.
For obvious reasons, I find myself wondering how many of these missing millionaires will end up in jail or having their assets seized by the Maryland government. My father’s belief in the criminal nature of the income tax system was cemented when the Minnesota Department of Revenue declared him to have been a Minnesota resident and seized his house in lieu of “unpaid” state taxes even though they knew – as was later confirmed in court – that he had followed all of the rules to become a Florida resident to the letter and had spent the requisite time out of Minnesota. Instead of producing significant revenue for the state, he’s now an annual $25,000 expense. Transforming your most productive assets into liabilities is arguably not the most sustainable approach if one wishes to remain solvent.
The lesson: don’t play coy with the residency laws. Just leave and come back for two weeks at Christmas or whatever if you must. It doesn’t matter if the law says a non-resident can be in a state for five months and thirty days; if the non-resident is foolish enough to come anywhere even remotely close to the statutory limit, the state tax authorities will simply declare he is a resident, send him a tax bill, and dare the newly-declared taxpayer to successfully document every single day spent out of state. And it’s not outside the realm of possibility that they’ll fabricate the data if they are sufficiently motivated.