Joshua D. Rauh (Stanford, Hoover Institution, NBER; Google Scholar), Taxes and Net Migration in California:

This paper explores the migration patterns of California taxpayers and analyzes the potential economic and revenue implications of this movement using the universe of California individual income tax filings from 2000 to 2019. While departure rates have outweighed in-migration rates for most tax brackets over the time period, the highest earners are particularly mobile around tax policy changes such as Proposition 30 in 2012 and the Tax Cut and Jobs Act (TCJA) of 2017. Net outflows of taxable income in the year TCJA was implemented reached $3.8 billion. Taxpayers who would experience a larger increase under TCJA rules due to the limitation of the state and local tax deduction are more likely to leave. High-earning movers have been consistently more likely to leave California for zero-income tax states since 2012.

Conclusion While much has been written about California’s recent low population growth rate, our analysis of microdata on taxpayers in the state sheds light on the migration patterns of income earners in the state’s various tax brackets, and their potential impact on economic activities and revenue in the state.

We find that high-income earners appear to be very responsive to tax policy changes, with spikes in the departure rates of these taxpayers in 2012 and 2017 following the enactment of Proposition 30 and the TCJA’s $10,000 cap on the state and local tax deduction. Further, we find that particularly for the highest-income earners, the rate of out-migration outweighs the average rate of in-migration by over 0.5 percentage point from 2001 to 2018, and spikes to over 1.5 percentage points for the very highest earners around the tax events we study.

The economic implications of these trends are significant for the state. With highearning individuals moving out, so too does a large portion of their income. This represents a loss of economic activity and tax revenues. We estimate that in 2017 alone, $21.6 billion in taxable income was earned by taxpayers who moved out of California in the next year while just $17.8 billion was earned by those moving in, resulting in a net outflow of nearly $3.8 billion that could have been taxed by the state. This loss is compounded over time as the income growth of movers occurs in an emigrant’s destination state, rather than in California.

Since approximately 2007, the highest income earners are increasingly fleeing California’s high-tax environment in favor of settling in zero income tax states like Nevada, Texas, Washington, and Florida, suggesting that these moves may be tax motivated. Finally, the vast majority of high-income movers left from four large cities, with the highest rate of departures occurring among San Francisco’s top income earners.

Because California’s tax revenues have become increasingly reliant on a relatively small number of very high-income earners who are highly responsive to tax policy changes, the state’s finances depend to some extent on these individuals remaining in the state and paying taxes. State policymakers are currently proposing more substantial tax increases to businesses and high earners, including a top marginal income tax rate of 18.05 percent (Walczak, 2022). It is important to take into account the evident behavioral responses and highly mobile nature of these individuals in considering the amount of revenue such a tax increase is likely to generate

https://taxprof.typepad.com/taxprof_blog/2022/04/rauh-taxes-and-net-migration-in-california.html