California Millionaires Flee State After Tax Hike

California lost an estimated 138 high income individuals due to the passage of the Proposition 30 - a tax hike pushed by Gov. Jerry Brown (D) and approved by voters in 2012, according to new research from Stanford University and members of the California Franchise Tax Board. 

The measure raised taxes on the state's highest earners by 8% - increasing it one percentage point to 13.3%, leaving California top-earners with the highest state income tax rate in the country. It also hiked the tax rate on income between $300,000 and $500,000 by 2%, while raising the tax rate on income over $500,000 by 3%.

Using California Franchise Tax Board data, the study led by Charles Varner, associate director of the Stanford Center on Poverty and Inequality, examined taxpayers who were and were not affected by the Prop. 30 tax hike, and found that in the two years before the increase was imposed (2011 and 2012) net in-migration for both groups "was positive and roughly consistent." After the tax increases, however, net in-migration fell for households hit with a tax increase of 0.5% or more - with the greatest reduction coming from households saddled with the highest effective tax rate.

For the largest and most recent of these reforms—a 2012 voter-enacted tax increase, the largest top marginal rate increase by any U.S. state over the past three decades—we observe a statistically significant effect in the expected direction. -Varner

The 2012 tax increases affected roughly 312,000 people, resulting in approximately .04% leaving the state. Numerically that's not a lot, but it's significant for several reasons - especially considering that an earlier 2004 tax increase had no negative effect on the millionaire population.

The research is an update to an earlier study that found more millionaires actually moved to California following a 2004 tax hike of 1% on income over $1 million to fund mental health services. 

“In other words, the highest-income Californians were less likely to leave the state after the [2004] millionaire tax was passed."

The 2012 tax hikes, however, were much larger than the 1% mental health surcharge.

One reason we wanted to update our previous paper is that this tax change in 2012 is the largest state tax change that we have seen in the U.S. for the last three decades,” Varner said.

[A]fter 2012, net in-migration declined for those facing an effective tax increase of 0.5 percent or higher. The drop was largest for the group facing the highest effective tax increase, wrote the authors, who included Allen Prohofsky of the California Franchise Tax Board. -SF Chronicle

That said, the researchers also noted that migration in and out of California accounts for a tiny portion of the state's millionaire ranks - a population which fluctuates by more than 10,000 people from year to year, while migration accounts for 50 - 120 people, or around 1%. The remaining 99% "is due to income dynamics at the top - California residents growing into the millionaire bracket, or falling out of it again." 

Moreover, the California millionaire population migrates for many reasons - and "changes dramatically over the business cycle." Tax increases are but one factor. 

If the population of top earners were determined mostly by tax rates, the basic population graph could be quite informative. However, population changes for other reasons. The strength of financial markets is critical, with the two peaks in Figure 1.5 corresponding to the dot-com boom (1999-2000) and the more recent stock market run-up (2007-08). These economic trends greatly increased the number of Californians earning very high incomes. Analytically, other drivers of the top-income population (particularly income growth) overshadow migration, which occurs on a smaller scale. -Varner

The millionaire population is highly correlated to the financial markets. The researchers found that the median person who earned at least $1 million in a given year earned at least $1 million in only seven of the 13 years before and after that year.

That could be one reason people don’t pull up stakes after a tax increase. Another reason: It’s hard to move when you have a high-paying job, a spouse who may work and kids. The report found that married people with children are less sensitive to the tax increase than married people without children. -SF Chronicle

Divorce

While tax increases account for a small number of CA millionaires leaving the state, a much larger factor is divorce, and as the authors note "The tax policy changes examined in this report are very modest compared to the life-impact of marital dissolution." 

"We find a strong migration effect for high-income earners who become divorced. In the year of divorce, the migration rate more than doubles, and remains slightly elevated for two years after the event."

The "divorce effect" was found to fall off as time passes, and is insignificant for divorces which happened over three years ago. 

So while the research team didn't find that millionaires are leaving "in droves" because of the tax hikes - and found that California was "consistently becoming a more attractive place for millionaires over the period we study" - the small but statistically significant migration tied to tax increases is notable. Not only can other states considering top-earner tax hikes look forward to outward migration, they should consider the economic impact of millionaires who move their businesses as well.