Chipotle Mexican Grill provided its new chief executive, Brian Niccol, with the usual blandishments when it recruited him from Taco Bell back in February, including $3 million in guaranteed salary and bonus, another $1-million bonus upfront and $5 million in stock-based incentives.
But the best perk may have been the one not disclosed by the company until May 23: It’s moving its headquarters from Denver, where it’s been located for 25 years, to Newport Beach. Chipotle said the move would take place over the next six months to “help us drive sustainable growth” and “align the structure around our strategic priorities,” whatever that means.
But it looks more like a personal gift to Niccol, who lives in Newport Beach. In fact, the relocation may even allow him to improve on the 20-minute commute he suffered through when he was CEO of Taco Bell, which is headquartered all the way over in Irvine. And he won’t have to uproot his family, which includes three school-age kids. That said, Chipotle’s relocation will cause countervailing problems for many of its 400 employees in Denver and New York offices, which will be closed. Some will be offered relocation help, the company says.
People who argue that the rich are leaving California because of high taxes really have a lot of explaining to do.
We don’t mean to pick on Niccol, 44, who has his work cut out for him in nursing the made-to-order burrito and taco chain back to full health following illness outbreaks traced to its restaurants in 2015. Investors are optimistic — they’ve bid up the company’s shares by more than 71% since his appointment was announced Feb. 13.
But the really interesting aspect of Chipotle’s headquarters relocation is how it illuminates what goes into a major corporate decision. Among other things, it gives the lie to all that guff you’ve been fed about taxes being a crucial consideration. (Chipotle declined to comment on its headquarters relocation beyond its initial announcement.)
Policy wonks, especially on the conservative side, make heavy weather over state taxes as a competitive factor. The “economic competitive index” conjured up by conservative economist Arthur B. Laffer for the American Legislative Exchange Council (ALEC), a right-wing policy advocacy organization, lists 15 factors by which to judge the pro- or anti-business leanings of states. Ten are keyed to state taxes, based on the assumption that lower taxes make a state more competitive for business.
Yet the evidence for the impact of tax cuts on economic growth is all on the other side. With a rise in gross domestic product of 3% in 2017, California was one of the nation’s fastest-growing states — faster than the low-tax states of Texas (2.6%), Florida (2.2%), Wisconsin (1.7%) and Kansas (-0.1%). Kansas, which then-Gov. Sam Brownback tried to turn into a tax-cut paradise using the ALEC prescription, had the distinction of being one of only two states to turn in negative growth last year; the other was Louisiana, which like other big-oil states was still suffering a hangover from the oil bust of 2015-2016.
California’s job growth since the beginning of 2011, when Jerry Brown took office as governor and moved to raise income taxes for high-income residents, has easily outstripped that of Kansas, Wisconsin and the nation as a whole.
By the way, Laffer’s economic competitiveness index ranked California fifth worst in the nation for “economic outlook” in 2016, well below Wisconsin (ranked 9th) and Kansas (27). Wisconsin’s anti-tax governor, Scott Walker, contributed the foreword to the 2016 report, in which he bragged about cutting taxes, attacking labor unions and forcing people on food stamps to take drug tests, none of which seems to have catapulted Wisconsin into the front ranks of American economic growth.
Had Chipotle’s Niccol ranked his tax burden as a major factor in deciding where to hang his CEO’s hat, he would have kept the company in Denver. Colorado’s personal income tax is a flat 4.63%. California is the poster child for the so-called millionaire’s tax: Its marginal rate for income over $1 million is 13.3%.
This means that for every million dollars Niccol earns after his first million a year, he’s paying $133,000 as a California resident but only $46,300 in Colorado. Some Colorado taxes may be higher than corresponding taxes in California, but the overall burden is lower in Colorado, all things considered.
The idea that taxes — especially millionaires’ taxes — play a preeminent role in where wealthy persons decide to live and corporations decide to locate is an enduring myth. It’s been fueled by a single endlessly recited case, the 2015 move of hedge fund billionaire David Tepper to Florida from New Jersey. (“Ladies and gentlemen, if you tax them, they will leave,” then-New Jersey Gov. Chris Christie subsequently warned legislators in threatening to veto a tax increase.)
But a myth it is. “Out of the hundred different things that influence where wealthy people live and work, taxes are on the list but they play a very small role,” says Cristobal Young, a Stanford sociologist who has examined the evidence on “millionaire tax flight” and found it wanting. “Other factors that matter more are the location of family, friends, colleagues, co-workers and clients.”
Factors that corporations often cite in their location decisions include the presence of a strong educational system, including higher education; a trained workforce; public amenities; and functioning transit and communication infrastructures. None of those features is easy to find in low-service, low-tax states or communities. As we’ve reported, Amazon’s demand for public handouts as part of the bidding for its HQ2 is entirely at odds with its demand for high-quality social and educational infrastructure.
In examining Internal Revenue Service tax return data from 1999 through 2011 for households reporting more than $1 million in annual income, Young found that when millionaires move, they tend to move from higher-tax to lower-tax states; but the overall magnitude of emigration was small and had little effect on the millionaire tax base.
Moreover, virtually the entire effect was accounted for by migration to one state, Florida. Other states without an income tax, such as Texas, Tennessee and New Hampshire, had virtually no allure for relocating millionaires. That suggests that Florida had something to offer other than the absence of an income tax — good weather or coastal access to the Caribbean, perhaps.
Young’s findings are supported by other evidence. California, which often is derided as the quintessential soak-the-rich state, sees persistent net out-migration to other states, chiefly Texas and the neighboring states of Arizona, Nevada and Oregon. But it’s not millionaires who are leaving — it’s low-income residents.
According to figures compiled by the state legislative analyst, the strongest outbound flow of residents is among those earning $55,000 or less, with Texas and Nevada the leading destinations. But California enjoys a net in-migration of people earning more than $110,000 a year, and especially of those earning more than $200,000. The state loses residents with two-year associate degrees or less, but gains those with graduate degrees.
That’s another indication that richer, more accomplished persons relocate chiefly to find opportunity. Once they’ve launched their careers in California, they’re loath to leave.
“Most people paying the top tax rate in California are typically at the peak of their career,” Young told me by email, “and made the decision about where to live, work and raise a family decades ago. People are very mobile when they are fresh out of college, but once they settle into career and place, hardly anyone is moving anymore.”
He adds that California’s relatively large tax burden on the wealthy has been a tradition dating back decades: “When taxes on high-income earners were first established in California, movies with sound were called ‘talkies’ and the famous L.A. sign read ‘Hollywoodland.’… People who argue that the rich are leaving California because of high taxes really have a lot of explaining to do.”
The facts seem to indicate that what corporate decision-makers value most in deciding where to live and work has more to do with quality of life and breadth of opportunity than with the size of their tax bill; the question boils down to whether the state has enough money to support the services they treasure, or whether it systematically impoverishes those services.
“In California, the state is responsible for kindergarten to grade 12 education, public colleges and universities, as well as much of the transportation system, social services, the judicial system, energy and water,” Young says. “Maybe California would be better off if it had less of those things, but I doubt it.”