Leaving California

Yesterday, a friend shared the story of a recent road trip visiting several of the states with no personal income tax.   He and his wife had visited Park City, Utah, Jackson Hole, Wyoming and a few other places. I seem to have a conversation like this on a weekly basis.  It’s anecdotal, but it shows the scary story of the migration of many people who are leaving California. People are voting with their feet. The Daily Caller addresses this concern in the piece below.  So, let’s review a number of the frightening reasons.

This month, Joshua Rauh and Ryan J. Shyu authored a paper titled, “Behavioral Responses to State Income Taxation of High Earners:  Evidence from California.” Joshua Rauh is a Professor of Finance at the Stanford Graduate School of Business, a Senior Fellow at the Hoover Institution and a Research Associate at the National Bureau of Economic Research, for which he co-wrote the report.  He has also addressed Public Pension Liabilities, something that you know scares me,  for Prager University (see https://youtu.be/Vdmk-wCqDlE).  Ryan J. Shyu is affiliated with the Stanford Graduate School of Business.

What did they discover?

First, over and above baseline rates of taxpayer departure from California, an additional 0.8% of the California residential tax filing base whose 2012 income would have been in the new top tax bracket moved out from full-year residency of California in 2013, mostly to states with zero income tax. 

Second, among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 45.2% of the windfall tax revenues from the reform.

The first observation is just a small crack in the dike, since an out-migration by less than 1 percent of the state’s top 1 percent is not alarming, but, it could be the start of a trend.

With the Federal Tax Cuts and Jobs Act of 2017, the ability to deduct state and local taxes (SALT) has literally become a Halloween trick.  Income tax rates may have been lowered, but limiting SALT deductions to $10,000 has an impact on the residents of states with high income tax rates.  Californians paying the top state personal income tax rate of 13.3% are probably paying a marginal tax rate closer to 23% just for this state, which is why one member in the 1 percent club was recently spooked out of California and moved to Florida (see MOORLACH UPDATE — Millionaires and Billionaires — July 17, 2018).

The Proposition 30 income tax increase in 2012 resulted in additional tax revenues being about half of what its proponents had anticipated.  Now that is a serious crack in the dike. How much more damage has Proposition 55 in 2016, extending the personal income tax increase, caused?  Tax increases are not static. Taxpayers change their behaviors. When Connecticut increased its tax rate on its 100 top taxpayers, their overall taxes decreased by 50% the next year (2016)!  While that is scary, it’s predictable.

The Yelp Economic Average released recently showed that national growth is up 0.07 percent.  Not bad, considering the bantering with China. However, California’s major cities are experiencing declines in strength.  Of the 50 Golden State cities Yelp covers, Bay Area metropolises like San Jose and San Francisco are eerily ranked 50th and 49th, respectively, while San Diego is in 46th place and Los Angeles is in 42nd.  The Capital City is in 34th place.

Other states see the cracks in California’s dike.  And why not? Can you imagine a state so focused on electrifying everything, expending incredible sums on renewable energy sources, when hydro and nuclear are available but excluded from the calculation formulas, and not taking the time to upgrade infrastructure to transport the electricity?  In the zeal to address climate change, California has created more greenhouse gases than it has reduced thanks to electrical lines being a causation of terrifying wildfires. That’s what Sacramento mandates that are not well thought out, combined with poor long-term planning, will do.

On blue states being mismanaged, if you’re not scared enough, check out MOORLACH UPDATE — California’s and Group 7’s Fiscal Health — September 30, 2019.  The bottom 10 states, on a per capita basis of their unrestricted net deficits, are blue states, with one exception, Kentucky.  Kentucky turned red the same night Donald Trump was elected President of the U.S., after 95 years of control by the Democratic Party.  Its Republican legislature has its work cut out for them in repairing Kentucky’s massive dike leaks.