SAN FRANCISCO
10/31/2012 12:51 pm ET | Updated Nov 01, 2012

California Millionaires Unlikely To Leave State If Taxes Are Hiked, Study Reveals

One of the major arguments against raising taxes on the wealthy, as Governor Jerry Brown hopes to convince California voters to do when they decide the fate of Proposition 30 this November, is that increased taxes will drive rich people out of the state.

Opponents of his plan claim that high taxes will force wealthy job-creators to "go Galt" by picking up their factories/world-conquering tech firms and relocating to a nearby lower-tax state or seaborne libertarian utopia.

However, a paper released earlier this month by sociologists Dr. Charles Varner and Dr. Cristobal Young of the Stanford Center on Poverty and Inequality argues that this isn't the case.

Using California income tax records to track people as they moved in and out of the Golden State, Varner and Young found little connection between top marginal tax rates the number of millionaires residing in the state.

The study looked at the number of high-net worth Californians who filed a resident tax return in one year and then filed a part-year/non-resident return the next to determine how many of them moved away over the period between 1994 and 2007. Researchers primarily focused on two events--the 2005 institution of a one percent tax on incomes over $1 million to pay for mental health services and a 1996 tax cut that slashed rates for top earners.

The authors found there to be little change in year-to-year net migration of very wealthy people, averaging only between 50 and 120 individuals, or approximately one percent of California's total population that earns over $1 million per year. Additionally, not only was there no observed tax flight following the 2005 Mental Health Services Tax, but the highest-income Californians were actually less likely to leave the state after said fee was enacted.

Similarly, the study found that the 1996 high income tax cut had "no consistent effect on migration."

While only a very small group of Californians earns more than $1 million per year (0.3 percent), that group accounts for a staggering 21 percent of all the income in the state.

The study's authors posit that proximity to jobs and social networks (the real-life kind, not the Internet kind) are a much greater factor in deciding where to live than any attempts to arbitrage individual rates between different tax jurisdictions.

The findings will likely to bolster Brown's case. The governor has spent much of the past year pushing Prop 30, a ballot measure that, in addition to raising the state's sales tax by the quarter of a cent, would temporarily hike rates on top earners from 10.3 percent up to 13.3 percent for a period of seven years. If Prop 30 is passed, California will have the highest top marginal tax rate of any state in the country.

Brown argues these additional revenue generation measures are critical to stave off Draconian cuts to education and social services.

"There just isn't any persuasive evidence out there to make you think that there would be a significant number of Californians moving because of this tax change," Carl Davis, senior policy analyst at the Washington, D.C.-based Institute on Taxation and Economic Policy, told the San Jose Mercury News.

"No one I spoke to said if this passes they're going to up and leave the state," agreed Jim Wunderman, the CEO of prominent Northern California business group The Bay Area Council. "California is the place to be if you want to be at the top of the game. There's a price to be paid for that."

Last year, Varner and Young compiled a similar study looking at tax rates in New Jersey and found that a 2004 tax hike on top marginal rates in the Garden State had no significant effect on the number of high earners who chose to reside there.

Young is a proponent of the governor's tax plan and, in an interview with the Stanford University Institute for Research in the Social Sciences, dismissed the argument that raising taxes on individuals could also have the effect of pushing small businesses out of the state.

"The state’s income tax data shows that only 19 percent of people in the millionaire tax bracket own businesses of any size (small, medium, or large)," the study's co-author explained. "Moreover, business ownership ties people to their state and makes them less likely to move. We show this in the millionaire data set: those who own businesses are less likely to migrate."

Since the early 1990s, California's total population has been slowly decreasing. The rate of that decrease has tracked much more closely to the overall health of the state's economy than any specific shift in tax rates. However, during that same time period, the number of millionaires filing in California has dramatically increased, from under 25,000 in 1990 to just over 100,000 today. California now has the highest proportion of residents earning over $1 million annually per capita of any state in the union.

A study released earlier this year by the conservative Manhattan Institute pinned the blame for California's overall out-migration trend on its above average unemployment rate, high population density in its coastal urban centers, the fiscal instability of the state government and regulatory climate that is often seen as hostile to business.

Recent weeks have seen support for Brown's tax measure falling as election day nears. A USC Dornsife/Los Angeles Times poll released last week found only 46 percent of registered voters now support Prop 30, a nine-point drop
from the previous month.

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