A new study published on Monday showed that when California raised its income tax rates it caused a “substantial one-time out-migration response” among wealthy residents, who left for lower-tax destinations.
The study looked at increases to state income tax rates approved by California voters in Nov. 2012 (Propoisition 30) of one to three percentage points for upper-income households. It raised the top marginal tax rate to 13.3 percent for incomes of more than $1 million.
The new rates were retroactively applied to 2012 and scheduled to expire at the end of 2018. They have since been extended through 2030.
The study found a consequent “sharp uptick” in wealthy taxpayer departures in 2013 when compared with previous years, particularly among those earning between $2 million to $5 million and more than $5 million.
About 0.8 percent of wealthy residents who would have had to pay the top tax rate left the state – which was considered “abnormally high” when compared with years prior. And the wealthy individuals who stayed reported lower incomes.
“Among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 45.2 percent of the windfall tax revenues from the reform in 2013,” researchers Joshua Rauh and Ryan Shyu wrote.
The majority of those residents left for states with zero income tax, Rauh and Shyu said.
Researchers noted it is important to understand how wealthy taxpayers respond to tax hikes, since they are implemented to raise revenue for the state.
An out-migration of residents from high-tax states – like New York, New Jersey and California – has been compounded throughout recent years thanks to changes made to the federal tax code by the Tax Cuts and Jobs Act, which was signed into law in 2017. It implemented a $10,000 cap on state and local tax (SALT) deductions.
Democratic New York Gov. Andrew Cuomo has already expressed concern an out-migration from the state could hurt its revenues. Cuomo has said he expects the cap on state and local tax deductions to have a negative impact on the state’s population – and tax receipts. He blamed a $2.3 billion budget deficit on the new tax law, calling the state’s financial situation “as serious as a heart attack” as wealthy residents leave.
The financial benefits of moving from a high-tax state to a low-tax state can be substantial. Individuals earning $650,000 can save more than $69,700 in taxes per year by moving from New York to the Sunshine State.