For nearly a decade, it has been the favorite argument of those opposed to higher state taxes for Connecticut’s wealthy: migration.

Simply put, if you tax them, they will leave.

For Republicans — and many moderate Democrats — income and wealth migration is not only a real threat, but a problem that’s upon us as Connecticut increasingly raises taxes to cover surging pension costs.

Among labor, urban Democrats and other progressives, however, the millionaire-with-a-suitcase is a myth, a fiscal boogey man used to scare liberals.

But despite the preponderance of stories of wealthy residents fleeing Connecticut, the empirical evidence shows the rich tend to move less frequently than low- and middle-income residents. The need for employment is still one of the main reasons people move, while home and business ownership — most common among high-income households — promote stability.

More important, income migration hasn’t been a big driver of states’ overall economic health. One of the largest tax cuts for the rich in modern Connecticut history nearly three decades ago did not spark an influx of millionaires into this state.

But that doesn’t mean Connecticut has nothing to fear.

Research shows the wealthy pay more attention to state tax rates than any other economic class. Although the sample size is small, the ratio of income leaving Connecticut versus that moving in has accelerated in the last few years.

Former hedge fund manager David Stemerman of Greenwich, a Republican who centered his 2018 gubernatorial bid on a message that Connecticut taxpayers have been taken for granted for decades, said a reckoning is underway.

“This assumption that the wealth in Fairfield County would always be there was built up, to some degree, by a lack of engagement from Fairfield County,” Stemerman added. “But they also have the view that they’ve been taken advantage of. Well, the door swings both ways.”

Migration trends

At first glance, income migration appears very real.

Connecticut lost $16.33 billion in annual federally adjusted gross income between 1992 and 2016, according to an analysis of tax data prepared by regular Forbes contributor Travis H. Brown, creator of the website howmoneywalks.com. It was one of 25 states that lost income during that period due to migration.

Many of the biggest losers on that list are states that ranked — and still rank — among the highest in income in the nation. Besides Connecticut, it also includes California, New Jersey, Maryland and Massachusetts.

In other words, the people moving out of rich states usually are richer than the people moving in, year after year.

According to statistics from the state Department of Revenue Services, the number of Connecticut households that reported earning more than $1 million erupted upward by 124 percent between 2002 and 2007, after climbing just 8.6 percent over the prior five years. This happened even while income was migrating annually out of the state. The boom within Connecticut overwhelmed any migration trends.

Embedded elites or transitory millionaires?

So maybe migration hasn’t been a key factor in moving a state up or down the wealth scale, at least so far.

An analysis published in 2016 in the American Sociological Review concluded the wealthy generally are “embedded elites” and not “transitory millionaires.”

“We find that millionaire tax flight is occurring, but only at the margins of statistical and socioeconomic significance,” wrote the panel of Stanford University sociologists and U.S. Treasury Department economists, who reviewed census data and 45 million tax records dating back 13 years.

Researchers concluded the wealthy are sensitive to state and local tax rates, more so than the rest of the population. But they are different in other ways, as well.

Wealthy households “are embedded in the regions where they achieve success, and they have limited interest in moving to procure tax advantages,” researchers wrote.

Why so? The study found that richer people are more likely to be married — singles are twice as likely to migrate as couples — have children, and own their own homes and businesses.

It also found the business connection should not be underestimated as an impediment to moving.

“When economic success is a joint product — rather than a purely individual accomplishment — there is a difficult network coordination problem for migration: one’s own willingness to migrate for tax purposes must align with that of co-founders, collaborators, and perhaps even clients,” analysts wrote. “People who achieve top incomes, in this view, are deeply embedded insiders who yield remarkable returns in part because of their social placement in a localized economic world.”

The study found the migration rate nationally of households reporting more than $1 million in income per year was 2.4 percent, which is lower than the 2.9 percent rate for the general population.

Researchers did find that “Florida appears to be the core pathway for tax-induced migration,” but other low-tax states are nowhere close to being equally attractive to the wealthy.

Florida, which ranked 39th in per capita income in 2017 according to the U.S. Census Bureau, gained the most income through migration. But Florida generally is considered an outlier, given its extremely attractive climate.

“When Florida is excluded, there is virtually no tax migration,” the report states.

Major tax hikes coming more frequently

But this doesn’t mean wealth and income migration don’t exist. And there are reasons, said University of Connecticut economist Fred Carstensen, who heads the Connecticut Center for Economic Analysis, why Connecticut policymakers should be concerned.

For one thing, it’s a short ride to any of Connecticut’s borders.

“We have the highest proportion of residents who work out of state of any state in the country,” Carstensen said, adding that’s a major reason one key metric of economic health has been sketchy.

Economists look not just at overall state income tax receipts but also at what share they represent of overall household income.

Total receipts fell from almost 3.9 percent of total household earnings in Connecticut in 2012 to 3.6 percent in 2014, the last year of available data, Carstensen said.

Much of that decline, he added, involves Connecticut’s struggles to regain financial services sector jobs lost in the last recession. Some of those displaced Connecticut residents found new jobs in New York and New Jersey.

And there is another issue. The state tax hikes are coming more frequently.

In 2009, the legislature and Gov. M. Jodi Rell agreed on a new budget that increased taxes by nearly $875 million. The centerpiece of that plan was a big bump in the top marginal income tax rate, from 5 to 6.5 percent.

Two years later, Gov. Dannel P. Malloy signed into law a tax hike worth more than $1.8 billion per year. And while it also raised income tax rates on middle-income households, it boosted the top marginal rate to 6.7 percent. Malloy, who warned frequently about the threat of wealth migration, had inherited an unprecedented $3.7 billion deficit, equal to more than 18 percent of the General Fund, during his first year in office.

A third major tax hike in 2015, worth almost $900 million per year, included another boost in the top income tax rate, up to 6.99 percent.

Is income migration starting to accelerate?

Income migration out of Connecticut may be nothing new, but a small sample size shows the rate appears to be accelerating.

The ratio of income leaving Connecticut versus that moving into the state is larger now than it was for most of the past two decades. And the ratio has risen significantly during the last two years on record.

“There’s a whole cottage industry of financial advisors that are talking to people about this (tax trend,) and showing them where else they can go,” said Peter Gioia, chief economist for the Connecticut Business and Industry Association. “That’s what is hurting Connecticut now more than anything, and I think it will continue to accelerate.”

Gioia also dismissed the argument that migration isn’t a problem as long as Florida is the only popular destination. One attractive alternative to Connecticut is risky enough.

“We’re an old state and people want sunny weather,” he said.

Stemerman said those who discount the theory of wealth and income migration should not underestimate common sense.

The message Connecticut sent for generations is clear: The state could afford to postpone billions of dollars in pension contributions — thereby forfeiting billions more in potential investment earnings — because its wealthy taxpayers could always make up the difference at some time in the future.

“When I spoke to people about this, they were deeply disappointed, dismayed and disgusted by what they heard,” Stemerman said. “The spoke about this in simple terms of fairness. They are being stuck with a bill from a failure to make responsible decisions.”

According to state Department of Revenue Services’ data, households that earned more than $350,000 per year in 2016 — just 3 percent of all filers — paid 41 percent of all state income taxes.

Stemerman said while he believes taxpayers across Connecticut feel taken advantage of when they hear the state pension history, the sticker shock is severe in Fairfield County because of geography.

“It is part of the New York media market,” he said. “They are somewhat disconnected to what is happening in Hartford. Some feel they’ve been taken advantage of while they were not as engaged, or paying attention, as well as they should have.”

The most recent Forbes magazine list of the nation’s 400 richest people listed nine billionaires from Connecticut, which is two more than last year. But just a few years ago Connecticut boasted 13 billionaires.

Doing too much, or too little, for hedge funds?

Those wary of Connecticut’s rising taxes warn that a small but vital component of the economy, the hedge fund industry, has great potential to be mobile.

According to the state’s nonpartisan Office of Legislative Research, Connecticut has the second-largest hedge fund industry in the U.S. There are 211 hedge fund managers and about 700 hedge funds listed on Preqin’s, a leading online industry information source.

Two of the world’s largest, Bridgewater Associates of Westport and AQR Capital Management of Greenwich, managed $151.7 billion and $74 billion in assets, respectively, based on 2015 data. Together they employ about 2,400 people.

Connecticut has provided more than $80 million in grants to the two funds combined — including more than $50 million to Bridgewater to develop a new headquarters in Fairfield County.

Still, at the inaugural Greenwich Economic Forum last month, investment business leaders expressed fears that Connecticut’s hedge fund industry could shrink as other states try to lure managers away.

Bruce McGuire of Darien, president of the Connecticut Hedge Fund Association, said the state should be developing high-speed rail services, creating vibrant cities and offering tax incentives to preserve and grow an industry that pays more than its fair share of taxes.

Instead it has allowed its highways to become congested and rail service is slower now than it was decades ago.

“I live here, I spend money here, I bought my house here,” McGuire, 54, said, adding that his daughter — a recent college graduate — went to work for a tech company in Boston. “Now I feel like I should be telling my son to go to New York, go to Boston.”

Easing the taxes on the rich

If state officials underestimate public indignation when it comes to Connecticut’s legacy of pension debt, some argue the estate tax is another major turnoff for the wealthy.

The tax is applied only to estates valued at more than $2.6 million, though the maximum tax liability starting in 2019 is capped at $15 million.

Still, Connecticut is one of 17 states that levy an estate or an inheritance tax, and the trend is headed away from Connecticut.

Indiana and Tennessee repealed their taxes in 2013 and 2016, respectively while Delaware’s went away this year. New Jersey’s estate tax will disappear starting Jan. 1.

Congress recently raised the exclusion level on the federal estate tax from $5.49 million to $11.2 million.

Connecticut has adopted a plan to gradually raise its exemption level up to the federal threshold by 2020. But with major state budget deficits projected between now and then, it remains unclear whether the General Assembly will stick with that plan.

Eliminating Connecticut’s estate tax entirely, while reducing income tax rates, were two of the key recommendations this year from the state Commission on Fiscal Stability and Economic Competitiveness, a 14-member panel dominated by business leaders.

The co-chairmen, health care entrepreneur Robert Patricelli and Webster Bank Chairman and former CEO Jim Smith, have taken heat from labor leaders and other progressives for this plan. Even though it recommends boosting the minimum wage to $15 per hour, it hinges on tax cuts that benefit the wealthy the most.

To fund these tax cuts, the commission also recommends boosting sales and business taxes and cutting $1 billion from the state’s operating budget. Given that most of the state’s debt costs are fixed by contract, critics say this cut likely would fall heavily on municipal aid, driving up property taxes.

“The commission’s proposals, taken holistically, can change Connecticut’s future,” Smith said.

Gov.-elect Ned Lamont, who will take office early next month, is trying to strike middle ground.

Lamont, who tapped former Bridgewater executive Ryan Drazewicz as his chief of staff, has pledged to keep income and sales tax rates stable despite inheriting major deficit projections for the next two fiscal years.

But when it comes to tax relief, Lamont’s focus for his first budget, due in February, is clear. “Connecticut’s middle class deserves a break, and that’s where we’re going to concentrate the energies of this administration and the budget,” he said.

Labor pushes back

Critics of the fiscal stability panel often point to one comment from commission member Cindi Bigelow, CEO of Bigelow Tea, who said during a Feb. 9 public hearing that “we want to make sure we are protecting the wealthy because they will just leave.”

The state’s labor leaders, who’ve been among the commission’s most vocal critics, argue the panel’s plan is founded on the myth of income and wealth migration.

Donald E. Williams Jr., executive director of the Connecticut Education Association — the state’s largest teachers’ union — said the commission report “puts coal in the stockings of the state’s middle class and gives diamonds and furs to the state’s wealthiest residents.”

This is the fifth article in an occasional series exploring wealth and income inequality in Connecticut and its impact on a state struggling to cope with massive debt. Find the other articles here.

Keith M. Phaneuf and Clarice Silber are reporters for The Connecticut Mirror (www.ctmirror.org). Copyright 2018 © The Connecticut Mirror.

kphaneuf@ctmirror.org

csilber@ctmirror.org