A new study published on Monday showed that when California raised its income tax rates it caused a “substantial one-time out-migration response” among wealthy residents, who left for lower-tax destinations.
The study followed how increases to state income tax rates approved by California voters in Nov. 2012 (Propoisition 30) effected the residents of California. The top marginal tax rate is currently 13.3 percent for incomes of more than $1 million. Orginally the tax applied to the years 2012 to the end of 2018, but have since been extended through 2030.
The study found a consequent “sharp uptick” in wealthy taxpayer departures in 2013 when compared with previous years, particularly among those earning between $2 million to $5 million and more than $5 million.
Slightly less than 1% percent of wealthy residents (those that pay the top tax rate) left the state. This is “abnormally high” when compared with years prior.
“Among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 45.2 percent of the windfall tax revenues from the reform in 2013,” researchers Joshua Rauh and Ryan Shyu wrote.
The majority of those residents left for states with zero income tax, Rauh and Shyu said.
A lot has been made about the Tax Cuts and Jobs Act, which was signed into law in 2017, and implemented a $10,000 cap on state and local tax (SALT) deductions. Many said this was the White House's way of punishing the democrat heavy states. If raising state taxes has some cause on an out-migration of residents from high-tax states as this study suggests than states like New York, New Jersey and California could be making things worse by implementing them because they are suppose to raise revenue for the state.
Democratic New York Gov. Andrew Cuomo has already expressed concern an out-migration from the state could hurt its revenues. Cuomo blamed a $2.3 billion budget deficit on the new tax law, calling the state’s financial situation “as serious as a heart attack” as wealthy residents leave.
The financial benefits of moving from a high-tax state to a low-tax state can be substantial. Individuals earning $650,000 can save more than $70,000 in taxes per year by moving from New York to Florida.