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Something's making Maryland millionaires leave

Gov. Martin O'Malley's notorious but temporary "millionaire tax" doesn't seem to have prompted rich folks to flee Maryland in much greater numbers than usual, according to the latest data. But that doesn't mean they're not fleeing, and it doesn't mean the tax should be resurrected, as some advocate.

Even without the millionaire surcharge that began in 2008 and expired in 2010, Maryland's income tax is sufficiently high to repel some of the wealthy. Add in this state's higher estate taxes, and we don't need another reason to push plutocrats into Virginia.

Should the 1 percent at the top of the pole pay much more in personal income tax to help rescue the society that has been so good to them? Of course. But that taxation needs to be done at the federal level, where there is less opportunity to avoid it.

In Maryland, you're rarely more than a few dozen miles from somewhere with a top personal rate that is 15 percent, 25 percent or even 60 percent lower, when you count Maryland's local income tax. All the surrounding states have lower personal income-tax rates.

Small businesses are usually partnerships or corporations taxed at the personal rate of the owners on their individual returns. As government jobs start disappearing, policymakers are trying to revive the lost Maryland art of increasing employment at private, profit-making enterprises. The first thing they need to remember is that while federal agencies are forever anchored to the earth, businesses and rich folks can go anywhere.

Maryland's millionaire migration became a big topic after authorities reported that the number of households with seven-figure incomes fell sharply in 2008, right when the millionaire surcharge took effect. That year, "only" 4,931 Maryland taxpayers booked income of at least $1 million — down a third from million-dollar filers the year before.

The implication among some conservatives was that the higher tax — reducing a wealthy household's take-home income by perhaps $15,000 — had prompted a mass exodus of BMWs and Cadillac Escalades across the Potomac.

Of course the most important variable between 2007 and 2008 wasn't the increase in Maryland's top bracket — on income of more than $1 million — from 4.75 percent to 6.25 percent. (City and county taxes on top of that had rich folks paying top Maryland rates of close to 10 percent.)

The global economy, Wall Street and business incomes all crashed during that period. Most of the decrease in million-dollar filers that year was caused by the fact that a couple thousand of them didn't have million-dollar incomes any more.

The number of million-dollar taxpayers fell again in 2009 and rebounded in 2010 along with the stock market, according to the latest analysis completed last week by the staff of Maryland Comptroller Peter Franchot. The millionaire surcharge raised between $50 million and $70 million per year during its three-year run.

Now that all the numbers are in, the emerging picture suggests that the rise and fall of Maryland millionaires has more to do with the economy than the tax rate. But that doesn't mean the tax climate is irrelevant.

Thanks to better software, state number-crunchers now track million-dollar filers from one year to the next and get a better idea of what's causing the change. In 2010, 209 households with million-dollar incomes the year before — 6.4 percent of all the million-dollar filers — submitted no Maryland tax return, suggesting that they fled the state.

True, they could have maintained Maryland residency but failed to file any tax return. Or they could have died. But the most likely explanation is that they moved to Virginia, Florida or some other lower-tax jurisdiction, perhaps upon retirement.

Florida, which has zero personal income tax, is by far the biggest recipient of refugee Marylanders, rich and otherwise. Over the last three decades more than 135,000 Marylanders have switched residency to Florida, according to the state Planning Department.

Over the last decade, in any given year, between 5 percent and 7 percent of million-dollar Maryland households have failed to file a Maryland tax return the next year, the new figures from the comptroller show.

Many of them are undoubtedly moving out, not just because of income taxes but because of higher Maryland estate taxes. Those can take a far bigger chunk of a rich household's assets than a change of a percentage point or two in the marginal income-tax rate.

Maybe the millionaire tax was also to blame. The number and percentage of million-dollar households filing in 2009 that disappeared from the tax rolls the next year were the highest in the decade-long period that the comptroller's staff analyzed.

But not by a lot. For example, 6.3 percent of million-dollar taxpayers disappeared from the records from 2000 to 2001, when rates didn't change and there was no millionaire surcharge. That's about the same change as from 2009 to 2010, when there was a surcharge.

"Despite all these issues that make the numbers a little bit of a moving target, fundamentally we're seeing roughly the same thing each year," says David Roose, director of the Bureau of Revenue Estimates for the state. "We see a pretty stable pattern of millionaires not filing the following year," no matter what the income-tax rate is.

But, as noted, relatively minor changes in income taxes are only a piece of the puzzle. And as the comptroller's new data show, more than 1,400 taxpayers over the last decade have filed million-dollar Maryland returns and then disappeared from the record. Something's making them leave.

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