Would Prop. 30 really drive millionaires out of California?
A counterpart to the biblical adage that the poor will always be with us is the notion that the rich will always be one tax hike away from leaving us.
That’s the foundation stone, after all, of the argument against raising taxes on “job creators” and of bestowing preferential treatment on capital gains (largely collected by the rich) over wage income (the sustenance of us other poor slobs).
And it’s a linchpin of the campaign against Proposition 30, Gov. Jerry Brown’s proposal to raise income taxes on income above $250,000, topping out at a 13.3% rate on income over $1 million. Go after the wealthy like that, the argument goes, and the rich will flow out of the state like rainwater cascading down a sewer grate.
It’s refreshing, therefore, to see some hard data on the issue, and illuminating to learn what it tells us, which is: Not so.
The data came from the California franchise tax board and was crunched by two Stanford sociologists at the request of Board of Equalization member Betty Yee. Their main goal was to determine if the last big California tax hike on millionaires, the mental health surcharge of 2005, had a detectable effect on the out-migration of those who paid it. (The surcharge added one percentage point to the tax rate of incomes over $1 million, raising the top marginal rate to 10.3%.)
In their just-published paper the Stanford analysts, Cristobal Young and Charles Varner, also investigated whether the state’s 1996 tax cut for high-income residents, which cut the top rate to 9.3% from 11%, had the opposite effect — that is, lured wealthy taxpayers into the state.
They found no such effects. The 2005 increase did not boost out-migration among the $1-million-plus population — in fact, the rate of millionaire out-migration declined after the hike. The 1996 tax cut didn’t increase the flow of millionaires into California, either. The analysis, moreover, also augments what we know about who California’s millionaires are, and why their customary response to a tax increase isn’t to flee.
None of this means that California can, or should, impose unlimited tax rates on the wealthy. Issues of fairness and tax efficiency count. And there’s a point at which high-income taxpayers may flee, even if we haven’t reached it yet. But it does show that fears of losing our millionaire base are, well, baseless.
“Moving away is the toughest and most costly response to a tax increase,” Young told me. For wealthy taxpayers, it may be far easier merely to hire a skilled tax planner to help them find every available break.
Nevertheless, the idea that tax increases are driving millionaires over the state line is harder to stamp out than a cockroach infestation.
“Millions flee California because of progressive tax system,” declared the right-wing Daily Caller website in July, in a typical example of erecting a 40-story tower of balderdash on a minuscule foundation. The conservative talk show host Roger Hedgecock, a former mayor of San Diego, wrote this year: “Under present soak-the-rich California income tax rates, the top 1 percent already pays most of the state’s income tax revenue. And that 1 percent is leaving the state.”
Well, no. According to an analysis of 2008-10 census figures by Jed Kolko, a former analyst at the Public Policy Institute of California who is now chief economist at the online real estate market Trulia, there was actually a net in-migration during that period among those in the top 40% of the income ladder — and the trend got stronger as you continued to move higher in income. (The top 1% starts at about $400,000.)
Kolko’s analysis updates work he did for the PPIC in 2009, when he found that there was more out-migration in 2004-07 among lower-income Californians than the wealthy. That indicated that it wasn’t income taxes driving residents out, but housing costs and other conditions that affect residents more broadly, including general economic conditions. “That doesn’t mean taxes have no effect,” he says, “just that taxes aren’t the main driver of whether people are leaving or coming to California.”
The modern study of behavioral responses to higher taxes really began with Harvard economist Martin Feldstein, who in a 1995 paper tried to show that the so-called deadweight loss to the economy of an income tax increase was far higher than anyone had supposed, and therefore there was less revenue gain in tax increases than anyone thought.
In the nearly 20 years since then there have been hundreds of learned papers investigating behavioral responses to tax changes, and you would be hard-pressed to say they’ve brought clarity to the topic. The Young/Varner paper is one of the very few, however, to focus on high-income taxpayers.
Young and Varner tracked migration patterns by looking for taxpayers who had filed a California resident tax return one year, a part-year or nonresident return the next year, and no California return the year after that. They compared the pattern they found in the years leading up to the 2005 tax increase to that of the post-2005 period, and also for several years before and after the 1996 tax cut.
Neither change had “any perceptible effect on the general upward trend in California’s millionaire population,” they wrote. After the 2005 tax increase went into effect, for example, the number of millionaires in the state kept rising — until the financial crisis of 2008.
Indeed, that points to their underlying conclusion, which is that the number of millionaires in California is largely a function of the overall economy. That population surged from the 1990s until 2000, the time of the dot-com bust, then regained its upward momentum in 2002, continuing until 2008. Migration is a very small contributor to the rise and fall of the millionaires’ club in the state — the typical year-to-year fluctuation, Young and Varner observe, is more than 10,000 people, but net migration is 50 to 120 people. Therefore, they wrote, nearly 99% of the annual change is due to “Californians growing into the millionaire bracket, or falling out of it again.”
In other words, the idea of millionaires’ flight stems from a basic misunderstanding of who millionaires are. The prevailing image is of people so rich they can pack up and move anywhere with ease; the reality is that most millionaires earn their income from their work, which is typically tied to its location — they have a job that can’t easily be relocated or replicated elsewhere, or a business that needs to be near its customers. Tiger Woods can live anywhere because he earns his income all over the world; but he’s a rarity, and there may be no California income tax rate that would bring him home from Florida, where the rate is zero.
Then there are the amenities with which California offsets its tax rate. Even if a millionaire had the flexibility to escape California taxes by moving to Las Vegas, what’s the cost to his standard of living of trading a home that gives him a view of a spectacular ocean sunset every day for life in a desert where the average summertime temperature is 106?
Young and Varner have given us a tool to judge the argument that raising taxes on the wealthy will deprive us of their company. There are other arguments, though they should all be judged against the rule set forth by the late conservative economist Herbert G. Stein, who observed that whatever the tax system, “people who pay the top rate will think it is too much.”
Michael Hiltzik’s column appears Sundays and Wednesdays. Reach him at firstname.lastname@example.org, read past columns at latimes.com/hiltzik, check out facebook.com/hiltzik and follow @latimeshiltzik on Twitter.
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