As California increases its income tax bite on the wealthy, some are tempted to flee, but how many do is debatable.
Here is an indisputable fact about California taxation: More than two-thirds of state general fund revenues come from personal income taxes and about half of those taxes are paid by the 1% of taxpayers atop the income scale.
In other words, K-12 schools, state colleges and universities, health and welfare support for the poor, prisons and many other services for 40 million Californians are utterly dependent on the ability and willingness of a few thousand very high-income residents to cough up tens of billions of tax dollars each year.
There’s a perpetual political debate about that dependency. If nothing else, it creates what is called “volatility” — the tendency of state revenues to soar during periods of economic prosperity but plummet during downturns.
There is, however, another aspect of being so dependent on wealthy taxpayers. As their tax bites increase, some react by voting with their feet and moving from high-tax California to a state with low or no income taxes, such as neighboring Nevada.
There have been anecdotal accounts suggesting such flight.
The state waged a nearly three-decade-long battle to collect taxes from high-tech inventor Gilbert Hyatt after he decamped from Southern California to Las Vegas.
Two years ago, the Wall Street Journal published an article about the $31.1 million sale of a Lake Tahoe estate once owned by casino tycoon Steve Wynn to Michael and Nora Lacey, a very wealthy couple who lived in a 30,000-square-foot Tudor mansion in Los Altos Hills.
They changed their official residencies to their new estate on the Nevada side of Lake Tahoe. “The Wynn estate is our permanent home and our main home and the Morgan estate is a beautiful place when we want to get away,” Mrs. Lacey told the Journal.
By joining other wealthy residents of Incline Village, the Laceys would be able to shield at least some income from California taxes.
The Oakland Raiders football team will soon become the Las Vegas Raiders and when the team’s quarterback, Derek Carr, who grew up in Fresno, negotiated a new contract a couple of years back, it was “back-loaded,” meaning most of the money will be paid after the team relocates. The Tax Foundation calculated that Carr would save $3.2 million a year in state taxes by plying his trade in Nevada.
A highly detailed study by two Stanford University economists, Joshua Rauh and Ryan Shyu, provides new fuel for debate over California’s dependency on the rich. They conclude that the out-migration and “behavioral responses” of high-income taxpayers increased markedly after voters approved Proposition 30, a 2012 measure that sharply increased their income taxes, and the effect was a reduction in net revenues to the state.
The 2012 increase, sponsored by former Gov. Jerry Brown, was to last only a few years, but a 2016 ballot measure, Proposition 55, extended it to 2030, thus increasing the incentive to move out or otherwise limit tax exposures. Moreover, a federal tax overhaul signed by President Donald Trump tightly limits the deductibility of state and local taxes, still another incentive.
In fact, as he introduced his last budget in 2019, Brown worried aloud about a potential flight of wealthy Californians. “People with higher incomes pay a lot more money, and some of them may be tempted to leave,” Brown said.
The study by Rauh and Shyu implies that some have already succumbed to temptation. And with public education advocates proposing still another income tax hike on the wealthy for the 2020 ballot, they could have still another incentive to depart.