Tax Policy:
Will 'Soak the Rich' Tax Policy Encourage Wealthy Taxpayers to Flee the State?

Former Assemblyman Chuck DeVore is not the only one to move out of California to save thousands – in some cases, millions – in state income taxes. According to the Tax Foundation, California has lost billions as a result of net taxpayer migration since 1993.

Will the threat of new soak-the-rich proposals accelerate the migration, and what effect would this have on state revenue? How many high-income California taxpayers would have to move out of the state for the soak-the-rich proposal to be unproductive?

Assume the top tax rate is increased by 2 percent on people with $1 million or more in taxable income. According to the Franchise Tax Board, for 2009, there were 30,951 California residents with $1 million or more of taxable income who paid $9.2 billion in state income tax, or an average $297,244 per person.

If an average high-income taxpayer moves to Washington (the Puget Sound is spectacular from April to mid-October, and a great place to live), it is possible to live extravagantly in nicer climates in the winter and still come out ahead. For the winter months, the taxpayer can go to a nice place (California, Hawaii, Florida, etc.) for 180 days (staying longer than that in any one state could establish residency) and spend $1,000 a day on a penthouse suite and $400 a day on meals and incidentals. The total cost of this high living: $252,000.

Even after this spending spree, the average high-income taxpayer would save $45,244, ($297,244 minus $252,000) based on current tax rates, and even more due to the extra 2 percent.

If the higher rates cause 20 percent of high-income folks to opt for living in the spring and summer in the Puget Sound area and other places for the balance of the year, the loss to the state in existing income tax revenue would be $1.84 billion.

This potential loss is roughly equal to the potential revenue that would be gained if all of the taxpayers stayed put in California. Imposing an additional 2 percent rate on these 30,951 taxpayers will produce additional revenue in the range of $1.8 billion to $2.1 billion.

Taxpayers have been eschewing California for years, according to the Tax Foundation.

From 1993 to 2009, the AGI migration-related figures for key states:

Destination State	Net California Returns Into Destination State	Net AGI Into Destination State
Alaska	2,024	$63 million
Nevada	171,317	$11.08 billion
Texas	110,128	$6.25 billion
Washington	75,137	$5.75 billion
Source: Tax Foundation

Even high-profile athletes who play for California teams sometimes establish their permanent residence in another state. For example, recent stories about the Los Angeles Angels signing star first-baseman Albert Pujols to a massive contract noted that one of his new teammates – outfielder Vernon Wells, who recently signed a deal worth $21 million a year for the next three years – flew to Los Angeles from his home in Texas (which does not have a personal income tax) to attend a press conference.

(Last year, a study of European soccer players presented empirical evidence that tax rates affect the decisions of top-paid athletes about where to live, and that the highest paid players migrated to countries where the tax burden is lower.)

Will 20 percent of high-income taxpayers move if the state's top income tax bracket is increased 2 percent? No one knows. However, it will be financially attractive for those who have the ability to relocate.

January 6, 2012

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