Dan Walters

Would extending California income tax hikes cause rich to leave?

Jerry Brown refuses to endorse tax extension on wealthy

Though he campaigned for Proposition 30 in 2012, Gov. Jerry Brown on May 13, 2016 would not say whether he supported an initiative this year to extend its tax increase on rich Californians. Video courtesy of the California Channel.
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Though he campaigned for Proposition 30 in 2012, Gov. Jerry Brown on May 13, 2016 would not say whether he supported an initiative this year to extend its tax increase on rich Californians. Video courtesy of the California Channel.

When voters passed Gov. Jerry Brown’s “temporary” tax increase in 2012, they gave California the nation’s highest marginal income tax rates, topping out at 13.3 percent.

It pushed the marginal state and federal rate in the highest bracket to 52.9 percent and would, many thought, lead to an exodus of high-income taxpayers to states with low or no income taxes, such as neighboring Nevada.

There are many anecdotal instances of taxpayers fleeing California – including a few among my own acquaintances – and one very lengthy court battle between California tax authorities and an inventor who fled to Nevada for tax purposes two decades ago.

However, as yet there’s no evidence of massive “tax flight,” as it’s been dubbed.

A lengthy study published in the American Sociological Review, charting movements between high- and low-tax states, found that “millionaire tax flight is occurring, but only at the margins of statistical and socioeconomic significance.”

A study conducted for Controller Betty Yee by Stanford University concluded, “Migration is a very small component of changes in the number of California millionaires.

“While the millionaire population sees a typical year-to-year fluctuation of more than 10,000 people, net migration sees a typical year-to-year fluctuation of 50 to 120 people. At the most, migration accounts for 1.2 percent of the annual changes in the millionaire population. The remaining 98.8 percent of changes in the millionaire population is due to income dynamics at the top – California residents growing into the millionaire bracket, or falling out of it again.”

This year, Beacon Economics produced a study of migration patterns for the Next 10 foundation and concluded that while California had a net loss of 625,000 people between 2007 and 2014 in state-to-state moves, those most likely to leave are over the age of 25 and lack college educations, while the state had a net gain in college-educated movers.

Whether California’s highest-income residents stay or go is no small matter.

The state’s one-percenters, about 150,000 families, pay half of its income taxes and thus account for about a third of general fund revenue – a share that has climbed sharply in recent years.

While there’s only anecdotal movement of tax flight to date, it’s difficult to predict whether that will continue because conditions may soon change.

The 2012 tax-increase package was, as noted earlier, sold to voters as being temporary, and as such was not likely to spur a major change in behavior.

However, a coalition of pro-spending groups, led by the California Teachers Association, is pushing Proposition 55, which would extend the high-bracket surtaxes for an additional 12 years. And were it to pass, there’s every reason to believe that the same groups would seek to extend it further, perhaps permanently, when the time came, circa 2030.

Would making higher rates at least semi-permanent do what the temporary taxes apparently did not do – spur the wealthy to flee California in serious numbers?

It’s a question that no one can answer – yet.

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