This is a perennial question and a popular topic for pundits, but so far California is still attracting the rich for its economic opportunities. At face value, there are more than 1 million millionaires in California — more than any other state. San Francisco has the highest density of billionaires of any city in the world.
Now, there are concerns that overtaxing the rich will drive them out of state. So Charles Varner, associate director of the Stanford Center on Poverty and Inequality, took a look at what happened when California voters passed two millionaire income taxes in 2004 and 2012. He found more millionaires in California after the 2004 hike, but a slight tax flight response after the 2012 increase. Specifically, the state lost an estimated 138 millionaires out of 312,000 in that group.
That’s a 0.04% increase.
Varner’s study concluded the opportunity to make money outweighs higher taxes.
“We often think that the only way for a state to be ‘competitive’ is to be like Texas — a low-tax, low-infrastructure, low-services state,” he and co-authors wrote. “But the reality is that the most competitive places in the U.S., the leading drivers of the economy, and the centers for top talent are New York and California — and they have been for generations, despite higher taxes on top incomes.”
Perhaps what the study did not capture is all the ways the rich can avoid California income taxes, including by avoiding residency. Generally, a taxpayer who spends more than nine months in a year in California will be presumed to be a resident. If a person stays less than six months — no more than 183 days — and maintains a home outside California without doing much other than visit Disneyland, then they can declare nonresidency.
But let the case of Gilbert Hyatt serve as a cautionary tale. Hyatt was a wealthy inventor who took up residency in Nevada just before cashing in on a patent. The state went after him and the dispute made its way all the way to the U.S. Supreme Court. It illustrates the extent to which the Franchise Tax Board will go to chase down tax dodgers.