Tuesday, February 22, 2011

Why do Millionaires Love New Jersey?

Greg Mankiw points out that, if you are wealthy and only care about taxes, then:

The worst place to die is New Jersey with a combined effective estate and inheritance tax rate of 54.1%.

According to the article he cites, Maryland has the second highest estate and inheritance tax rates.

But according to CNBC, these two states have more millionaires than any other state in the country except Hawaii.

Revealed Preference Speaks

New Jersey may be a bad place to die, but apparently it's a popular place to for the wealthy live.

I can understand the appeal of Hawaii, but what's the appeal of New Jersey?.

Lawmakers may have strong incentives to raise estate taxes in these states, but millionaires get the last move: it's pretty easy to move from one state to another within the U.S. So what makes the high tax states so appealing to millionaires? Are millionaires created there in disproportionate numbers?

What benefits are they getting that outweigh the costs, and what lessons, if any, can we draw?


  1. NJ probably has an innate anchoring effect; being closer to NYC creates an illusion of being relatively less expensive?

  2. And off course those millionaires usually have a business or two in The City.

  3. Here are 3 ideas about why we might observe this phenomenon, even if business opportunities were equal across states.

    (1) "Crowding Out Other Taxes." Assume for a moment that a state needs a certain amount of tax revenue but decides how to raise it. It could be really good for millionaires to live there if the state is achieving its revenue goal from estate taxes and inheritance taxes, rather than property taxes (millionaires have bigger houses), sales taxes (they have more disposable income) and state income taxes (they presumably have more wage income). The data could really be showing that the millionaires are pursuing low taxes in areas where they're taxed while alive.

    (2) "Getting over the threshhold." These tax policies also mean that near-millionaires can accumulate wealth faster and -- voila! -- they put their net worth over the $1M threshhold and an incremental millionaire is created, reinforcing the effect.

    (3) "Paying after you're measured, not before." Even if the millionaires never, ever move, and after the estate tax they end up eventually paying the same total amount of taxes, wouldn't such a process bias the number of measured millionaires in the state upward (since they're millionaires for most of their lives in the state, and only get their assets confiscated post mortem)? The number of post-estate-tax estates over $1M should be the same, but the number of pre-estate-tax estates (e.g., live millionaires) would be higher in the states that get their revenue at the end rather than at the beginning.

    If the inheritance and estate taxes are so high, though, perhaps we should ask how many millionaires choose to retire in these states? I don't know too many people who choose to retire in NJ or MD compared to, say, NV or FL.

  4. CNBC is ranking based on a percentage of households. http://www.cnbc.com/id/39405689?slide=14

    The 212 thousand in NJ is much smaller than the 716 thousand in CA (#9 on the percentage ranking).

    An alternate analysis would look at the size of the innovative industries (count of companies formed) in various states. That might explain CA, MA, NJ. For Hawaii, look at "native born" millionaires versus migrants.

    The value of being in/near the presence of the innovators allows the states to extract a tax premium.

  5. I suspect those NJ millionaires are concentrated close to NYC. They are probably maximizing after tax income vs being NYC residents. Conversely, if you are in South Jersey and closer to Philly, you probably move across the line into one of the Philly burbs because the tax burden is less in PA. And South Jersey tends to be doing less well economically than North Jersey which may confirm this hypothesis. So if you look at the three states together, you probably see a lot of tax-driven locating strategies and consequences for the regional economies.

  6. Why do estate and inheritance tax rates matter when you are dead?