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Would Prop. 30 really drive millionaires out of California?

The idea that tax hikes drive the rich out of state persists, yet data show the number of millionaires in California is mainly a function of the overall economy.

October 28, 2012|Michael Hiltzik
  • California Gov. Jerry Brown holds up a sign in support of Proposition 30 during a visit to San Diego last week. The proposal would raise taxes on income above $250,000.
California Gov. Jerry Brown holds up a sign in support of Proposition 30… (Lenny Ignelzi, AP )

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.

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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.

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