Would a wealth tax really drive the rich out of the state?

In summary

Research on California taxpayers has shown that some of the highest earners leave the state in response to large tax increases, but studies vary in their estimate of how many leave.

Lawmakers in blue states like California may prefer to tax the rich, but there is always a risk: What if the rich simply move elsewhere?

Last week, Assemblyman Alex Lee said he was introducing a new tax on “extreme wealth.” It wasn’t the first time the Milpitas Democrat pushed the idea. But this year, he had a backup.

Lawmakers in seven other states, including Connecticut, Hawaii, New York, Illinois and Washington, introduced new taxes for the wealthy on the same day.

“The counterargument is that the rich will just leave,” Lee said. “Well, this is kind of a ‘You can run but you can’t hide’ strategy.”

Lee’s proposal would apply to people with a net worth of $50 million or more, taxing their wealth at 1% per year. Wealth above $1 billion would be taxed at 1.5%. The tax would apply to about 23,000 households, or the top 0.1 percent in the state, and raise about $21.6 billion in revenue a year, according to calculations by UC Berkeley economist Emmanuel Saez, who helped design the national tax on the wealth of Massachusetts Senator Elizabeth Warren. He proposed and participated in some of the proposals at the state level.

Unlike the income tax, a general wealth tax is unprecedented in the US. The proposal would apply to assets including stocks in private companies, works of art and collectibles, “foreign financial assets” and more.

Even in the overwhelmingly Democratic state Legislature, the proposal is a long shot. When Lee introduced similar legislation last year, he didn’t get a first hearing, let alone a vote.

But Lee remains optimistic. One change is that last year the state was flush with cash. This year, California has a projected budget deficit of $22.5 billion.

That shortfall, Lee said, is almost exactly the same amount the tax is projected to raise annually.

“The top 5 percent of income earners pay 70 percent of personal income tax. And personal income tax is California’s largest source of revenue,” said Robert Gutierrez, executive director of the California Taxpayers Association, which opposes the idea. “So if even some of those taxpayers reconsider California as a place to live, that has an impact on the (state) budget.”

But do rich people really move when their tax bill goes up? And if they do, what is the size of the exodus?

Research on the topic is growing rapidly, but a clear consensus has not yet emerged, Cornell sociologist Cristobal Young and US Treasury economist Ithai Lurie wrote in a recent article.

In 2018, Charles Varner and Cristóbal Young, then both at Stanford’s Center on Poverty and Inequality, worked with Allen Prohofsky at the California Franchise Tax Board, analyzing decades of California tax data to uncover the impacts of various tax changes. . Before and after the tax increases in 2004 and 2012, they compared the top income earners affected by the tax increases with those just below them on the income scale: people who still make a lot of money, but don’t were affected by the increases.

They first looked at the number of people with incomes of more than $1 million per year who left the state each year compared to people who moved into it. Before 2004, there was a net emigration. In the years after the 2004 tax increase, that outflow dwindled, and by 2007 it reversed: More millionaire earners were coming to California than leaving. That persisted after another tax increase in 2012 (data goes through 2014).

That leads to another important point: The number of people who earn more than $1 million in California each year fluctuates widely, but people who move to the state or make investments only account for a small part of the change, they found. The average number of people who earn more than $1 million per year varies by about 10,000 people each year; net migration represents only about 50 to 120 people. In other words, the number of super high income earners that California has each year is almost entirely driven by other things; mostly “California residents who are becoming [million-dollar-earner] stand, or fall off again,” they wrote.

Next, they looked at the 2004 tax increase, comparing top earners affected by the tax with near-peak earners who weren’t, and found that the rate of top earners who actually left the state declined slightly after the 2004 tax increase, while near-high earners continued to exit at the same rate. In other words, the 2004 tax increase did not drive people who were paying a bigger bill out of the state.

Then they looked at California’s 2012 tax increase, triggered by the passage of Proposition 30, which increased the tax rate by 1% for people making between $250,000 and $300,000, to 2% for people making earn between $300,000 and $500,000, and by 3% for people who earn more than half a million dollars annually. “This was one of the largest effective tax rate increases in recent United States history,” Varner said.

The researchers found a “very slight” difference: For every 1 percentage point increase in the tax rate, they found that the state lost about 0.04% of its million-dollar income to net migration — about 40 people, Varner wrote in an email. .

There’s also a broader context to this research that reveals the specific effects taxes have on wealthy people who move, Varner said: California has increased its population of million-dollar earners overall. In 2009, that rarefied group numbered about 75,000 (adjusted for inflation), and by 2019 it was over 158,000, Varner said, based on data he received from the state tax board.

In 2019, a different group of Stanford researchers also used tax data, again to examine the effect of the 2012 tax increase. They found a much larger effect: The tax increase caused an additional 0.8% of top earners to leave the state the year following its entry into force.

That 0.8% translates, with some fancy math putting more weight on top of top earners to account for its disproportionate impact, into an additional 535 people earning $500.00 per year or more as a result of the tax. The impact on California’s budget, of course, is in the revenue lost from that departure rather than the number of people leaving.

Not all studies on this topic have the same finding, said Saez, the Berkeley economist. But “if you were to summarize the work,” he said, “you’ll find that some people move to avoid paying higher taxes, but it’s quantitatively small, which means the fraction of your taxable income that you lose… (is) typically quite small. .” He thinks Lee’s proposal would make some wealthy people leave, but the number of people would be small relative to the number of wealthy people in the state.

The possibility of ultra-rich people, and the taxes they pay and the dollars they spend, leaving the state is not the only criticism made by opponents of the tax. They also argue that you will face a legal challenge immediately, especially since the tax is levied on wealthy individuals for a few years after they leave California. And they argue that it will be extremely difficult to assess the totality of the assets of the ultra-rich.

But, Lee notes, we already tax people on one form of wealth, homes, and “we’ve developed a complete assessment system for millions and millions of housing units,” he said.
“Then we can do the same with megayachts.”