As the state Legislature starts 2014, a bevy of tax ideas are hot on its agenda. California's leaders are talking about a statewide soda tax, higher cigarette taxes, raising the vehicle license tax, a tax on oil extraction, and of course the old favorite – raising taxes on the rich.
Polls show the idea of taxing the rich is popular, and California's voter-approved Proposition 30's tax hikes in 2012 certainly reinforced that view. Proponents for higher income taxes on the rich argue that taxes are just one of a host of personal and economic factors people consider when deciding where to live, including job opportunities, proximity to family, affordable housing, commute times, climate, the state's scenery and beaches, and more. And as home to major economic engines like Hollywood and Silicon Valley, there's no doubt California has a lot going for it.
Yet, the state is still ranked a dismal 48th for its business climate by the nonpartisan Tax Foundation and not a week seems to pass without another story about a business fleeing California for lower-tax pastures. But businesses aren't the only ones leaving the state these days.
A recent Bloomberg News story examined the growing number of financial advisory firms specializing in helping the wealthy move their assets from one state to another to reduce taxes: “As fewer Americans pay the estate tax and top earners in New York and California owe more state income taxes, wealth planners say their clients are looking for new ways to escape those levies. The asset shifts mirror steps corporations such as Google Inc. have taken across national borders to lower the taxes they pay. Within the U.S., some individuals who want to sell companies that they built move shares from home states to out-of-state trusts so the gains won't be subject to state income taxes.”
A 2009 study by Boston College looked at the movement of wealthy individuals in and out of New Jersey over a 10-year period. In the five years before a state tax increase on the wealthy, $98 billion in net wealth moved into New Jersey. But in five years after the tax hike, $70 billion in wealth moved out of the state.
Similarly, a study for the National Bureau of Economic Research examined income tax returns over an 18-year period and found that high taxes on inheritance, wealth, income and property were all associated with wealthy people moving their money into states with lower taxes. This is vividly illustrated at the website HowMoneyWalks.com, which maps data from the IRS on where individuals pay their taxes over time. Their data show that $45 billion in adjusted gross income moved out of California between 1992 and 2010, and that the rate of wealth leaving has been increasing steadily in recent years. In contrast, Texas, Nevada, Arizona, Florida and other states with comparatively low tax rates experienced an in-migration of wealth.
HowMoneyWalks.com data shows that while California was losing $45 billion, Texas gained nearly $25 billion in adjusted gross income during those years, with $6 billion of it coming directly from California.
Don't let the outliers of Hollywood and Silicon Valley fool you--California isn't invincible. Higher taxes, especially on the rich, do drive wealth out of California. As Bradley R. Schiller, professor of economics at the University of Nevada, Reno, told The New York Times, “If you are talking about an income tax of 13 percent on a millionaire in California and an income tax rate of zero percent on a millionaire in Nevada, to argue that it doesn’t affect a millionaire’s locations decision is to say all millionaires must be stupid.” The state Legislature should have a better plan than hoping California's highest earners are stupid.
Adrian Moore is vice president for policy at Reason Foundation. This article originally ran in the Orange County Register.