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California's taxes driving more rich people out of state, study showes

Christian Fernsby |
A study has found that taxes play a role in determining where people choose to live, and in California taxes on high earners are driving wealthy people out of the U.S. western state.

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The study, titled "Behavioral Responses to State Income Taxation of High Earners: Evidence from California," analyzed taxpayers' response to Proposition 30, a California taxation measure.

In November 2012, California voters passed the measure to increase state marginal income tax rates of 1 percent to 3 percent for upper-income households for seven years from 2012 to 2018.

As a result, an additional 0.8 percent of the top bracket of the residential tax base left the state in 2013, according to the study published in the February issue of the American Economic Journal: Economic Policy.

Despite the overall increase in total tax revenue, California lost more than 45 percent of its windfall tax revenues within the first year due to the departures of wealthy people who wanted to avoid Proposition 30, the study found.

Within two years after the measure was implemented, 60.9 percent of those same revenues was eroded, driven largely by "the intensive margin," according to the study.

The top 1 percent of California taxpayers shoulder 50 percent of the burden of the state's income tax and evidence shows that they are highly responsive to tax policy, said Joshua Rauh, co-author of the study and a fellow at the Hoover Institution of Stanford University.

Using the universe of California individual income tax filings from 2000 to 2020, Rauh has studied the migration patterns of California taxpayers in the past years and has a number of articles published on this movement.

His study found that California residents' departure rates have outweighed in-migration rates for most tax brackets over the time period, and the top earners are particularly mobile, showing the highest rates of departure around tax policy changes, such as Proposition and the Tax Cut and Jobs Act in 2017.

"Squeeze more income from California's high earners will backfire," Rauh warned in a recent article published by City Journal, a magazine of the conservative Manhattan Institute for Policy Research.

"Tax-the-rich propositions play well at the ballot box, but the economic outcomes have been worrisome. In a typical year, California was losing 1.5 percent of its wealthiest taxpayers, only partly offset by in-migration of 0.5 percent," he said in the article.

Rauh's opinion is shared by Tyler Cowen, a Bloomberg Opinion columnist and a professor of economics at the George Mason University. Cowen calculated the Golden State's tax rate in a story published Monday, noting "California's highest income tax rate is 13.3 percent.

That is in addition to a top federal tax rate of 37 percent. California also has a state sales tax rate of 7.25 percent, and many localities impose a smaller sales tax."

"So if a wealthy person earns and spends labor income in the state of California, the tax rate at the margin could approach 60 percent. Then there is the corporate state income tax rate of 8.84 percent, some of which is passed along to consumers through higher prices. That increases the tax burden further yet," the story read.

California's most high-income taxpayers have been more likely to head to four zero income tax states Nevada, Texas, Florida, and Washington -- from 2013 to 2018, Rauh said.

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