Garden State Politics

Posted by admin on February 7th, 2010 in Uncategorized

Sorry, this is going to be a long one. So I’m breaking it into sections.

Section 1: The News
The Star-Ledger offers us competing opinions on taxes and the Great Exodus from New Jersey. First up, conservative commentator, Paul Mulshine:

The reaction to McGreevey’s class warfare [note: income tax increase on high wage earners] was similar. The wealthy fled New Jersey or just declined to move here. New Jersey’s net drop in wealth between 2004 and 2008 was $70 billion, the Center on Wealth and Philanthropy stated.

Mulshine makes a direct connection between the increase in income tax and the loss of wealth. His fellow columnist, Tom Moran, however, isn’t so sure:

For a careful academic like John Havens, a specialist on wealth at Boston College, these are trying times.

He finished a study last week that showed New Jersey lost nearly $70 billion in net wealth from 2004 to 2008 because we lost more wealthy people than we gained.

Then the politicians got a hold of it. And suddenly the report was twisted out of shape, presented as proof that New Jersey must rush to cut income taxes on the rich by $1 billion in the midst of our worst budget shortfall ever.

“I didn’t say that,” Havens says. “Taxes are just one possiblity.”

In fact, Havens thinks the causes of this trend may lie elsewhere. But no matter. His study now has the status of a rotten tomato in Trenton’s latest food fight. It’s going to be used as the combatants see fit.

Moran goes on to say that the State Treasury Department shows the number of families earning more than $500,000 has actually increased during the time McGreevey’s and Corzine’s income tax hikes were in effect – and then quotes State Senator Joe Pennacchio’s disbelief in those numbers.

Section2: The problem
This is a problem with almost any academic study that impinges the political arena in any way. Such studies are almost always misconstrued and spun both ways until the arguments little resemble the puzzle the study attempted to unravel. One reason for this is that most people don’t actually read the studies, they just read summaries, most of which are written by people with political agendas.

The second one is more a function of human nature. Let’s say you believe something – like the earth is the center of the universe. If someone presents evidence to the contrary, you tend to be skeptical – in fact, you tend to not even notice they are talking. If someone presents evidence that your belief is right, you not only pay attention, but, in your mind, a mild link becomes incontrovertible evidence. You see this in full effect with Senator Pennacchio – he isn’t a bad guy and he isn’t dumb. He’s just human and was caught flat-footed facing evidence that didn’t go along with what he “knows” is right. So he disbelieves it.
Section 3: Avoiding the Spin
The first thing to do is to avoid the spinning then and look at the study itself (pdf file). First, let’s look at the sponsors of the study: “…funded by the Community Foundation of New Jersey and the Enterprise Trust at the New Jersey Chamber of Commerce.” Not to impugn the researchers involved, but when the funders of the study have a dedicated position towards non-taxation, it has to be kept in the back of any reasonably skeptical reader’s mind.

Secondly, the goal of the study (page 2):

…primarily on the movement of household wealth and secondarily on the movement of household charitable capacity into and out of New Jersey in two time periods: the years between 1999 and 2003 and the years 2004 and 2008.

You’ll note that there’s no mention of finding the reasons for any movement of wealth or charitable capacity. That means such conclusions are beyond the scope of the study, and while making those conclusions may be fun and will probably provide ideas for future research, they aren’t exactly kosher.
Section 4: The background
Next, you look at the foundation that is laid for this particular study.

The first report in the series, “Where Have All the Dollars Gone?” documented research conducted at the Edward J. Bloustein School of Planning and Public Policy at Rutgers University in October of 2007. The Rutgers report focused on the loss of income and skills due to net out-migration, and it concluded that New Jersey’s economy is “strong and well balanced.” Nevertheless, the state is experiencing a net outflow of residents that takes a large toll on the state’s economy.

Sigh. I remember that study. It’s wrong. There is no “net migration out of New Jersey.” The study itself only noted a “negative rate of increase in the growth rate” – and to get that it neglects “net international migration, which has been positive for each year of the decade to date”(see note b for chart, page 2). In other words, if you don’t include people coming here from other countries, our population is increasing less quickly than it used to. That is not the same as actually shrinking, which is what a “net outflow of residents” would be.

The current research notes the shoddy conclusion in the follow up study, “Trends in New Jersey Migration”. The Princeton study continues to insist that the population in New Jersey is shrinking. But it contains an odd finding (page 2):

In broad terms, the data indicate, first, that out‐migration from New Jersey to other states is driven by low‐income individuals; and second, that the state is seeing a modest net “brain gain” of highly educated people moving into New Jersey. The data also indicate that the high cost of living (and especially the high cost of housing) is the main factor that leads to the state’s net out‐migration. The impact of the “half‐millionaire tax” on the migration of New Jersey’s wealthiest households is small.

The problem of excluding international migration cannot be understated. I know a lot of people immediately think “illegal immigrants.” But think about all of the shopkeepers and nurses and doctors who you can’t understand…it doesn’t include them, either. Right now, minorities account for about 33% of New Jersey’s total population, and foreign-born persons account for about nearly twenty percent of the population (and it is growing).

Back to the current study – most of the focus is on this finding:

In the first half of the decade 1999-2008, the net effect of migration for New Jersey resulted in a substantial increase in both household wealth and charitable capacity. In the second half, the direction of flow was reversed. The net effect of household migration resulted in a loss of substantial household wealth and expected amounts of charitable giving.

No one is really pushing that last clause of the last sentence, but that is what the study was commissioned to find.

Section 5: What it really found
Beyond that, no one is reading the very next sentence:

The change was due mostly to a large decline in the number of wealthy households entering New Jersey between 2004-2008 and a moderate increase in the outflow of wealthy households leaving New Jersey.

Contrary to what is being spun, wealthy people leaving the state is not the largest problem here – it’s that the number of wealthy people moving into the state has slowed. That doesn’t address the possible causes of that factor, but it isn’t, as Senator Pennacchio stated, that we are “chasing people out of the state.” We just aren’t chasing them into the state. As the report states on page 3: “In proportional terms, the major change came from large reductions of in-migration by wealthy households from foreign countries, New York State, and Pennsylvania.”

A second important part that is being neglected is that the effects of a large outflow are only a fraction of the actual outflow. The report estimates that an $80 billion outflow caused only a $2 billion reduction in charitable capacity. So the gross amount of assets is large, but the revenue derived from them are fairly small. Particularly when you consider this is wealth which is not directly taxed by the state, and not income which is.

Page 5 contains another interesting thing to bear in mind:

The heads of wealthy households entering New Jersey are younger, earn higher incomes, and are more frequently employed. Heads of wealthy households leaving New Jersey tend to be older, more likely to be retired or widowed and have more wealth…(snip) The wealthy entering are more frequently employed in manufacturing and less frequently in finance, legal, or other professional industries. The households entering New Jersey less frequently hold CEO type positions than the departing heads of households. In comparison, the wealthy coming to New Jersey are less likely to be retired or widowed and they own substantially less wealth than their out-going counterparts.

Yeah, it ain’t taxes that make people leave…it’s retirement. Retirement brings up the idea of…Florida, right? Plus, someone who is at the end of their working years has accumulated more wealth than someone who is in the middle of those years, right?

Then there are demographic patterns at work here that are larger than New Jersey. For example, page 8 tells us:

Nationally, from 2004 through 2008, there was roughly a 22 percent reduction in the level of interstate migration of households in comparison with the prior 5 years…(snip) There has been a gradual general net migration of households from the northeast to all other regions, particularly to the southern regions of the country

Now, look at what the study says specifically about Florida (page 9):

Many wealth holders own at least two residences, and when one of the homes is in the northeast corridor of the U.S. the second residence is often in the south. In the past five years Florida was the destination of 17% of households, 20% of the wealth, and 37% of the charitable capacity leaving New Jersey.
During the same time period 6% of households migrating to New Jersey came from Florida. In fact Florida is the third largest source of households migrating to New Jersey and they owned 6% of the wealth and provided 7% of the charitable capacity of all households migrating to New Jersey.

If only we could give Florida crappy weather…

Also, let’s note – wealth, in Florida, is directly taxes. For a single person with wealth of more than $250,000, it is 0.01%, and for married families, it is the same rate for wealth of more than $500,000. And while property taxes are lower in Florida, there are also local taxes on sales and gasoline and clothing and food are taxed. So it probably isn’t taxes that are motivating people to move to Florida. Wonder what it is?

Well, if you flip down to Table 7, you will find out that the single largest reason millionaire households leave the state is – “New Job or Job Transfer – 42.4%.” The second largest reason is “Change in Marital Status – 10.8%.” No other reason reaches double digits. In the second half of the study, the largest reason is…”New Job or Job Transfer – 49.1%.” The second largest reason is “Other Job-Related Reasons – 20.5%.”

Taxes? Not hardly.

Just to make a jump back to the income/wealth issue…Table 1 shows that, while net wealth may have migrated out of New Jersey, net income migrated into the state. In fact, total net income has grown by a little over $1 billion. And guess what – nearly all of that growth occurred in the second study period (when the state was supposedly going broke).

Section 6: What to take away
So where does that leave us? First of all, forget the spinning about taxes. It just doesn’t apply. What we can tell is that:
1) In the last five years, greater wealth has moved out of the state than moved in – largely due to:
1a) Less international migration of wealthy people into New Jersey – but since international migration is down overall, this is not particular to New Jersey and is likely due to two things – toughened immigration requirements and the worldwide economic downturn.
1b) Increased movement to Florida – again due to two factors – people retiring and moving south; and the finance industry consolidating and moving south after 9/11
2) Younger, higher-income earning wealthy households have moved into New Jersey to replace older, wealthier, lower-income wealthy families – so overall wealth is temporarily lost. But as these new families remain in Jersey and accumulate wealth, they will catch up with those who are now moving out.
3) The largest reason for people moving out is because of their job (new job or retiring) or because they get divorced or married. Neither of these reasons is directly related solely to taxes.
4) The overall loss of wealth with rising income may pose a danger to charitable contributions – which is what the study was trying to find – but it actually bodes well for tax revenues, to the extent that it impacts the revenue/tax picture at all. In fact, the only tax-related conclusion from the Community Foundation of New Jersey, which co-sponsored the study, is this:

New Jersey’s state income taxes have risen to levels above New York, Pennsylvania and Connecticut, and there is not a deduction on state income taxes for charitable giving.

5) While the difference in the periods is stark, there is no disaggregated information given that indicates why these two periods are chosen. The economic problems of the latter half of the second period are probably going to have an outsized negative impact, especially for those families whose wealth is tied closely to the stock market.

The overriding lesson: Take political spin built on an academic study with a grain of salt until you read the study. Then, more often than not, you won’t pay attention to the spin anyway.

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