What if that weren’t true?
In late 2019, a pair of economists, Enrico Moretti and Daniel Wilson, published a paper titled “Taxing Billionaires: Estate Taxes and the Geographical Location of the Ultra-Wealthy.” In that paper, they followed the movement of 400 of the nation’s richest people (the “Forbes 400”) and came up with a mathematical model to predict the chances that a particular rich person would move out of state in response to either an enactment of or a hike in that state’s estate tax.
Why concentrate on the wealthy? Only they are on the hook for the estate tax. Even in Hawai’i the estate tax doesn’t kick in unless the deceased person has amassed $5.49 million in wealth, so we are not talking about ordinary folks you see on the street.
Then, they theorized, based on earlier research, that if one of these rich people moves, they will pay a lot less of the former home state’s other taxes, such as income tax and sales tax. In that way, the move will cost that state.
They then tried to answer this question: “If X State adopts or increases an estate tax, will that state make money or lose money, and how much?” They tried to answer that question both with a targeted tax aimed at the ultra-wealthy (a so-called “billionaire’s tax”), and with a broader based estate tax.
When they modeled the billionaire’s tax, they found that 48 states had an expected revenue gain. But two states could be expected to lose money: California and Hawai’i. “For Hawaii,” the study said, “cost-benefit ratio [of having a bigger estate tax would be] equal to 1.43. The expected present value of having an estate tax is ‑$73 million. The difference between Connecticut [which would benefit from an estate tax] and Hawaii is largely due to the difference in their personal income tax (PIT) rate. Hawaii’s PIT is higher than Connecticut’s. The higher PIT rate in Hawaii means a higher opportunity cost of foregoing billionaires’ income tax streams.”
When they modeled the broader-based tax, assuming that the less ultrawealthy (people who had estates big enough to pay estate tax but who weren’t billionaires) were just as likely as the Fortune 400 to pack up and move in response to a tax hit, they found 42 states with an expected revenue gain. Eight states were expected to come up short. Of the states that don’t have an estate tax now, four were at risk: California, Idaho, Nebraska, and New Jersey. Of the states that do have an estate tax, four were at risk: Vermont, Oregon, Minnesota, and—you guessed it—Hawai’i.
Although the study didn’t pin down exactly when a state would be at risk for losing money if adopting an estate tax, it observed that California, the state with the most revenue at risk, had the highest personal income top tax rate. Hawai’i has never been far behind on that metric. We were even seriously considering legislation last session (Senate Bill 56, Senate Draft 1) that would have pushed our top personal income tax rate way past California’s, and we earned national attention, perhaps national derision, for that bill.
Over the years, this column, among others, has been accused of pandering to the wealthy and for being opposed to the “fundamental fairness“ that requires those with more to pay their fair share. We at the Foundation, however, are not trying to decide social policy. We’re trying to present the facts and the risks of unintended consequences. Our legislators are the ones making the hard policy choices. They should be making these choices with more information, not less.