Another Urban Legend

A recent comment on our blog post reminded us of a persistent, but factually incorrect, rumor frequently heard in state policy circles – that rich people are leaving California in droves for states with lower personal income tax rates. Curious to find out whether this was actually true, CBP staff dove into data provided by the IRS showing the incomes of Californians who stayed, moved into, or moved out of the state from 1995 to 2007. What we found was that taxpayers who left the state actually made less on average than those who stayed. Those leaving the Golden State in 2006-07 had an average adjusted gross income of $55,907, while those staying had an average adjusted gross income of $67,722.

The CBP also looked at what happened following the passage of Proposition 63 in 2004. As you may recall, Proposition 63, dubbed “the millionaire’s tax,” imposed a 1 percentage point income tax rate on personal incomes over $1 million to fund mental health programs. The CBP examined Franchise Tax Board data before and after the implementation of Proposition 63. We found that the number of millionaire taxpayers increased significantly after the passage of Proposition 63. Between 2004 and 2007, there was a 48.6 percent increase in the number of tax returns filed by taxpayers with adjusted gross incomes of more than $1 million. In contrast, the total number of taxpayers in the state increased by 8.6 percent during the same period. While we certainly don’t claim that high-income earners moved to California to pay the higher tax rate, there is also little evidence to support the claim that they are leaving to avoid paying the higher rates.

There will always be people of all income levels moving to and from California. But preliminary CBP research shows that the rumor that the wealthy are leaving California is just another urban legend that deserves to be dispelled.

– Jean Ross

2 Responses to Another Urban Legend

  1. marwick says:

    I’d be more interested in the ages of those leaving the state. If it is older and retired, then I’d expect their annual incomes to be less. They’re living on pensions, assets, and social security at that point, and can leave the state and go next door to save an immediate 9.3% in income taxes, plus a few percent in sales taxes.

    In addition, the increaes in CA’s population is mostly from immigration (legal and illegal), and the babies of those immigrants. Those folks tend to be poor. Meanwhile, there is a net outflow of residents. By 144,000 in 2008.

    http://news.yahoo.com/s/ap/20090112/ap_on_re_us/fleeing_california_3

  2. This makes total sense… California is a costly place to live, and the income tax is one of the least significant factors in that whole equation. People coming into the state, and leaving it, are likely putting those other factors far ahead of potential income taxes.

    People with fixed incomes, people retiring, people cashing out their home equity and relocating to a place where it will go further, people with low incomes whose earnings will drop less than their cost of living if they relocate, are all incentivized to move elsewhere.

    Contrawise, people moving into the state are probably high income in the first place – they’re either capitalizing on new wealth to relocate to a more pleasant place to live, or accepting a high income position in the technology or entertainment industry, etc.

    I can guarantee you, as well, that someone making a million dollars, usually via capital gains, etc., is not focused on avoiding income taxes, until and unless they’ve actually made the money – at which point, the taxes are dealt with after the fact, and are just part of the cost of cashing in.

    As well, income is still generally tied to geography, and there are damned few places you can make a million the way you can in Silicon Valley or Hollywood. If you don’t make the money first, you can’t pay the taxes. :)

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