Would a wealth tax actually drive the rich out of California?

Do wealthy people actually relocate when their tax bill goes up? And if they do, how large is the exodus? Research on the subject is growing rapidly, but a clear consensus has yet to emerge and studies vary in their estimation of how many people leave. 

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

Last week Assembly member Alex Lee said he was introducing a new tax on “extreme wealth.” Lee’s proposal would apply to individuals with a net worth of $50 million or more, taxing their wealth at 1% annually. Wealth beyond $1 billion would be taxed at 1.5%. The tax would apply to about 23,000 households, or the wealthiest 0.1% in the state, and would raise about $21.6 billion in revenue per year, according to calculations from UC Berkeley economist Emmanuel Saez.

Unlike income tax, a tax on overall wealth is unprecedented in the U.S. The proposal would apply to assets including shares of privately owned companies, art and collectables, “financial assets held offshore” and more. 

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

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

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

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

In 2018, Charles Varner and Cristobal Young looked at decades of California tax data to figure out the impacts of several tax changes.  They found that the number of million-dollar-plus earners in California each year fluctuates considerably, but people moving to the state or pulling up stakes only account for a teensy portion of the change.

The average number of people earning more than $1 million per year varies by about 10,000 people each year; net migration accounts for only about 50 to 120 people. The number of super-high earners California has each year, in other words, is almost entirely driven by other stuff; mostly “California residents growing into the [million-dollar-earner] bracket, or falling out of it again,” they wrote.

Next they analyzed the 2004 tax increase — comparing top earners affected by the tax to the almost-top earners who aren’t — and found that the rate of top earners leaving the state actually declined slightly after the 2004 tax increase, while the almost-top earners continued to leave at the same rate. In other words, the 2004 tax increase didn’t drive the people paying a larger bill out of the state.

In a recent paper, Cristobal Young, a sociologist at Cornell, and Ithai Lurie, an economist at the U.S. Treasury, look at how incentives and embeddedness shape millionaire tax flight, highlighting the small effect tax reform has had on millionaire migration thus far, and raising questions about how work-from-home policies will impact the future geography of the elite.  

Read more in the CalMatters story written by Grace Gedye.

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tax the rich collage
Illustration by Miguel Gutierrez Jr., CalMatters