Millionaire Tax Did Not Drive Wealthy Californians Out of State

October 23, 2012

In a joint report by Princeton University and Stanford University, Charles Varner and Cristobal Young examined if increases in California’s top income tax rates lead to changes in the migration of top incomes. Counter to the belief that millionaire taxes may lead to millionaire migration with potentially serious loss of revenues for the states, the authors found that the state’s “millionaire tax” on high earners did not lead to an exodus of wealthy Californians.

By creating a census of CA millionaires using available state income tax records, Varner and Young tracked the effect of two taxes: the Mental Health Services Tax in 2005, which levied a 1% increase on income tax in excess of $1 million; and the 1996 tax cuts that only applied to high incomes. If tax-flight migration assumptions are correct, the 2005 tax increase would have led to a millionaire migration out of state, and the 1996 tax cut would have led to an in-state migration.

The study, however, found that migration constitutes a very small component of changes in the number of millionaires in California, accounting for, at most, 1.2% of annual changes in the millionaire population.  The remaining 98.8% of changes is due to income dynamics (residents growing into or falling out of the millionaire bracket).

In response to the study, Chris Hoene of the California Budget Project released the following statement:

“This new research dispels one of the most persistent myths about state tax policy: that wealthy Californians will leave the state to avoid having to pay a slightly higher tax rate on personal income. [Varner and Young’s] findings show that a higher personal income tax rate didn’t cause the rich to leave the state and also suggest that the risk of so-called ‘tax flight’ is outweighed by other factors, such as existing ties to family, friends and career.

“With California voters turning their attention to the November ballot, this new research undercuts the claim by opponents of Proposition 30 that this measure’s personal income tax increase, which would largely affect the top 1 percent, will drive high earners out of the state.”

Proposition 30 would temporarily increase the sales tax rate by 0.25% for four years, as well as the personal income tax rate on annual income in excess of $250,000 over seven years, to fund public education.  While it once polled as high as 64% in favor, support has now eroded to 54% in late September.  A majority is required for the proposition to pass.