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'Millionaire's Tax' popular with cash-strapped states

As state income tax revenues creep downward, rates are slowly headed the other way: upward. As fewer taxpayers pay in (due largely in part to heavy unemployment rolls and lower incomes), states are grasping at other sources of revenue. At the top of their lists? Millionaires.

As of the end of last year, eight states imposed a so-called "Millionaire's Tax," or a surtax on high-earners: California, Connecticut, Hawaii, Maryland, New York, New Jersey, Oregon and Wisconsin. That number is expected to change. In 2010, even more states are considering increases on top wage earners.

Opponents of the "Millionaire's Tax" point to Maryland as a cautionary tale. With 2008 tax returns finally tallied, The Wall Street Journal reports that nearly one-third of Maryland's millionaires have gone missing. The numbers show that fewer millionaires filed tax returns in the Free State, with 5,529 returns filed as compared to 7,898. The overall tax revenues paid by rich filers fell by 22%.

One possible answer to the drop? A millionaire flight out of the state. According to the data, one in eight millionaires who filed a Maryland tax return in 2007 filed no return in 2008. Reportedly, a Bank of America Merrill Lynch analysis of federal tax return data on people who migrated from one state to another found that Maryland lost $1 billion of its net tax base in 2008 by residents moving to other states.

Interestingly, the data suggests that the same kinds of increases have not affected the numbers of filers in California and New Jersey. That may be a function of geography: California is near the high tax state of Oregon, and New Jersey neighbors the similarly situated state of New York. However, Maryland taxpayers may find it financially sensible to move to nearby lower-taxed states like Pennsylvania and Virginia. There is, however, no concrete data to support that theory.

Despite the criticisms, some in Maryland are still attempting to make the tax increases permanent. Delegate Jolene Ivey (D) has defended efforts to keep the tax in place, saying, "Programs that help children, the elderly, the poor, the environment, education, the arts, the unemployed -- everything's on the chopping block. Millionaires should continue to share in the pain."

In contrast, New Jersey is headed the other way, despite a lot of grumbling from Republicans and Democrats. In the midst of a state budget crisis, Gov. Chris Christie is allowing tax increases on the top wage earners to disappear.

Most politicians are in agreement that states facing holes in their budget have limited options. Spending cuts are on the top of the list for favored solutions, but cuts may not be enough for most states. Sales tax increases appear to be in the cards for many states, while an overwhelming majority of other states are bumping up state fees and finding new ways to add or increase sin taxes on alcohol, cigarettes and sugary foods.

The general feeling among those who favor increases on the top marginal income tax rates seems to be that millionaires and other high-wage earners can bear an increase of 1% more than middle or lower class taxpayers. But will that be the answer that drives millionaires away?

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