If We Tax Them, Will They Leave? New Research Shows They Won’t

October 29, 2012

One hotly debated policy question in California is whether increasing taxes on the wealthy will spur them to leave the state. That question finally has an answer grounded in rigorous research rather than anecdotes. A new study finds no evidence that millionaires left California after voters approved Proposition 63’s “millionaire tax” in 2004. In fact, contrary to popular claims about the “danger” of increasing taxes on the wealthy, millionaires were actually less likely to leave California after the 1 percent personal income tax surcharge on incomes over $1 million was established. So-called “tax flight” by the wealthy appears to be nothing more than an urban legend.

Charles Varner, doctoral candidate at Princeton, and Cristobal Young, Ph.D., assistant professor of sociology at Stanford, analyzed the full universe of California’s personal income taxpayers – a comprehensive dataset that meets the gold standard for study design – during an 18-year period. Varner and Young looked at “outmigration” rates before and after Proposition 63 for two groups: those whose annual incomes exceeded $1 million and therefore were subject to the “millionaire tax” and those whose annual incomes ranged between $500,000 and $1 million and thus were not subject to the tax. Varner and Young’s analysis shows the exact opposite of what might be expected. Outmigration among millionaires actually declined after the tax increase took effect, and it declined to a greater extent for those with incomes well above $1 million, who had a much larger share of income subject to the tax. “In other words,” the researchers conclude, “the highest-income Californians were less likely to leave the state after the millionaire tax was passed.” The study also found no change in “inmigration” rates before and after Proposition 63 went into effect, suggesting that the measure’s tax increase did not deter high-income earners from moving to the state.

Varner and Young also examined migration rates after a large personal income tax cut in 1996, when California’s top marginal tax rate dropped for single filers with incomes over roughly $100,000 and joint filers with incomes over roughly $200,000. If tax changes influenced migration, then this tax cut should have provided a greater incentive for high-income earners to stay in California and reduced the disincentive to move to the state. Instead, the researchers found “no consistent effect of the 1996 tax cut.” In other words, even tax changes affecting a much broader group of high-income earners appeared to have little or no influence on migration.

While anecdotes about wealthy individuals leaving California often receive significant attention, Varner and Young’s analysis of high-income earners as a whole suggests that taxes simply aren’t a key factor in their decisions about where to live. In part, that’s because modest personal income tax increases tend to represent just a tiny fraction of wealthy individuals’ incomes over time. Varner and Young found, for example, that most Californians with incomes over $1 million in a given year remained millionaires for only a handful of years. This means that in the long run, the typical millionaire would have owed an additional tax equal to just one-tenth of 1 percent of her total earnings – a drop in the bucket that likely would be outweighed by the costs of moving out of state. Like most people, high-income Californians tend to be tied to the state by their work and careers as well as by connections to family and friends. To move just to lower one’s tax bill might mean not only giving up the very source of a high income, but also sacrificing important personal ties.

Varner and Young’s study is particularly relevant at this moment, as Californians prepare to vote on the revenue-raising measures on the November ballot. Specifically, this research refutes a key claim by opponents of Proposition 30: that the measure’s personal income tax increase, which would primarily affect the wealthiest 1 percent of Californians, would drive high-income taxpayers from the state. “Tax flight” by the top 1 percent seems especially unlikely under Proposition 30 given that the measure’s personal income tax increases would be temporary – in effect for just seven years. Proposition 63’s tax increase, in contrast, was permanent. By showing that tax increases targeting high-income earners have no impact on relocation, this new study represents an important contribution to the debate.

– Alissa Anderson

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New CBP Analysis Provides Side-by-Side Comparison of Propositions 30 and 38

October 5, 2012

The political season is heating up, and once again the statewide ballot includes several measures that ask voters to weigh in on important state policy issues. Two of these measures, Proposition 30 and Proposition 38, would raise additional revenues through temporary tax increases, but differ significantly in their approaches as well as their implications for the state budget.

To help voters better understand Propositions 30 and 38, a new CBP analysis provides a side-by-side comparison of these measures. This easy-to-read table draws from the recent CBP reports, What Would Proposition 30 Mean for California? and What Would Proposition 38 Mean for California?, and aims to succinctly explain what each measure would do. As noted in our full reports, the CBP has endorsed Proposition 30 and neither supports nor opposes Proposition 38.

This side-by-side look at these measures sheds light on some notable strengths of Proposition 30. For example, the measure would raise almost four-fifths of the new revenues (78.8 percent) from the top 1 percent, a group whose average inflation-adjusted income has skyrocketed during the past generation, even while average incomes for low- and middle-income Californians have decreased. Furthermore ­– and most importantly – while Propositions 30 and 38 would both increase funding for K-12 schools, Proposition 30 also would provide the revenues needed to help close the state’s budget gap and stabilize the state’s finances. Proposition 30 thus would allow California to reinvest in education, while at the same time bringing the state budget into balance and avoiding deeper cuts to public programs and systems that are essential to all Californians.

– Jonathan Kaplan

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The CBP Looks at Proposition 31

September 28, 2012

A new CBP analysis shines a light on Proposition 31, one of the most complex initiatives set to appear on the November 6 statewide ballot. Californians who’ve heard about the measure probably know that it would establish a two-year state budget cycle. But that’s just one of numerous provisions – which run the gamut from the modest to the sweeping – that would affect government at the state and local levels, as our new report shows. For example, Proposition 31 generally would require bills being considered in the Legislature to be in print and publicly available for three days prior to passage, a modest improvement that would help boost the transparency of the lawmaking process. However, the measure also includes several far-reaching provisions whose benefits aren’t so clear. These include allowing local governments to preempt state laws and regulations with locally developed alternatives, giving the Governor unilateral authority to cut state spending during a fiscal emergency, and establishing new pay-as-you-go, or “paygo,” rules that generally would require the Legislature to pay for some spending increases or tax cuts – those that exceed $25 million per year – with offsetting spending cuts and/or revenue increases.

Our analysis identifies a number of policy issues raised by Proposition 31. For example, allowing local governments to substitute locally designed rules for state laws and regulations could result in widely varying local approaches across a range of policy areas in which uniform statewide standards may be more appropriate. Moreover, Proposition 31 could also result in significant local policy changes that might not otherwise receive approval through the state’s ordinary – and longstanding – legislative and regulatory review processes. The measure’s paygo provisions also raise concerns. While properly designed paygo rules can be a valuable component of public budgeting practices, spending cuts and tax increases do not operate on a level playing field in California. Tax increases require a two-thirds vote of the Legislature, whereas spending cuts can be adopted by majority vote. Consequently, Proposition 31’s paygo rules likely would result in the costs of new or expanded programs being paid for with cuts to existing services, rather than with tax increases. Our analysis also shows that the measure’s most far-reaching changes would be placed in the state Constitution, making them difficult to alter in the future if they prove to be ill-advised or unworkable.

– Scott Graves

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Wealthiest 1 Percent Would Provide Most of the New Revenues Raised by Proposition 30

September 11, 2012

A new CBP Budget Brief released today looks at Proposition 30, which was placed on the November 6 ballot by Governor Jerry Brown via the initiative process. Proposition 30 would increase personal income tax rates on very-high-income Californians for seven years and raise the state’s sales tax rate by one-quarter cent for four years. The CBP has endorsed this ballot measure.

Proposition 30 would take an important step toward addressing California’s budget gap over the next few years. The measure would provide much-needed new revenues – an estimated $6 billion per year on average when fully implemented, according to the Legislative Analyst’s Office – and would help shield public priorities, such as education and safety-net supports for families hard-hit by the recession, from further budget cuts.

State General Fund revenues are lower today as a share of the economy than in all but two of the past 40 years. The state’s budget challenges are partly the result of a steep drop in revenues brought about by the Great Recession, but the shortfalls also reflect years of tax cuts, including large, permanent corporate tax breaks enacted during the depths of the downturn. 

Lacking sufficient revenues, lawmakers bridged recent years’ budget gaps through deep spending cuts to virtually all areas of the budget. To take one example, the state reduced Proposition 98 spending for K-12 education by $7.4 billion between 2007-08 and 2011-12 – a drop of $1,271 per student.

Proposition 30 raises new revenues by asking those who have benefited most from the economic growth of recent decades to contribute the most to laying the groundwork for California’s future prosperity. As shown in our Budget Brief, the measure raises nearly 80 percent of its revenues from the wealthiest 1 percent of Californians, who have annual incomes over a half-million dollars and who experienced substantial income gains over the past two decades. The average inflation-adjusted income of the top 1 percent was 82.0 percent higher in 2010 than it was in 1987, while the average inflation-adjusted income for Californians in each of the bottom four fifths was substantially lower than in 1987.

Low- and middle-income Californians  – who bore the brunt of the Great Recession’s effects on the job market – would see very small tax increases under Proposition 30, on the order of $24 to $55 annually in sales and personal income tax increases combined. In contrast, those in the top 1 percent would pay an additional $21,883 in taxes on average.

Proposition 30 presents voters with the opportunity to begin reversing a decade of disinvestment in California. The measure looks to the state’s wealthiest to provide the bulk of the revenues that would help stabilize the state budget and begin to restore funding for education and other critical public services, so that all Californians can share in the state’s future prosperity.

­– Hope Richardson

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Clearing Up Some Confusion About the Governor’s Proposed Tax Initiative

June 20, 2012

By now, many Californians are well aware that Governor Jerry Brown is seeking to qualify an initiative for the November ballot that would ask voters to temporarily boost sales and income taxes, with the increase primarily affecting the wealthiest Californians. What is less well known is that the Governor’s measure is also the keystone of the state’s effort to permanently transfer – or “realign” – several public safety, health, and human services programs, along with a dedicated source of funding, to the counties, a process that began last year. In particular, the Legislature redirected to counties two existing revenue streams – portions of the state sales tax and the Vehicle License Fee (VLF) – that are intended to flow to counties indefinitely in order cover the cost of the realigned programs. Counties, however, hoped for greater certainty than a change to state law can provide. The Governor’s initiative would address that concern by placing the revenue shift in the state Constitution, thereby guaranteeing that the sales tax and VLF dollars set aside for realignment will continue to flow for that purpose. The measure would also provide key legal protections for both the state and the counties as realignment rolls out, as we explain in our recent report.

Unfortunately, there appears to be some confusion about the relationship between the realignment provisions and the temporary taxes in the Governor’s measure. A recent post on Prop Zero, for example, claims that “much of the tax revenues [the Governor] would raise in his measure go to providing funding to locals for his realignment plans.” The post further argues that the Governor’s measure makes “the mistake of establishing a permanent change in governance … with temporary taxes.” This analysis is off the mark. As explained above, the Governor’s measure would place in the state Constitution the current, ongoing revenues that were already shifted to counties as part of last year’s realignment. In other words, the measure would combine a permanent change in governance with a permanent source of funding for counties’ new responsibilities. In contrast, the Governor’s proposed temporary tax increase has nothing to do with realignment. Instead, it would raise revenues in order to help balance the budget and stabilize the state’s fiscal situation.

In short, the Governor’s initiative encompasses two separate sets of revenues with different purposes and time frames – and never the twain shall meet.

– Scott Graves

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