Millionaire tax does not drive away wealthy Californians, study finds

Oct. 24, 2012, 2:18 a.m.

A new joint study by Stanford and Princeton researchers shows that California’s increases in taxes on the wealthy have not led to a migration of individuals with high net worth from the state. This information comes two weeks before California voters decide on Proposition 30, a proposal by Governor Brown to raise income taxes on those earning more than $250,000 per year by up to 3 percent and increase the sales tax by 0.25 percent.

The study was conducted by Cristobal Young, assistant professor of sociology, and Charles Varner, doctoral candidate in sociology at Princeton. Both researchers are affiliated with the Stanford Center on Poverty and Inequality.

Young and Varner examined whether California’s 2005 Mental Health Services Tax, which raised the tax rate on income above $1 million by one percentage point, led to the tax flight of high earners from the state.

Starting with the question, “Do changes in California’s top income tax rates lead to changes in the migration of top incomes?” the researchers found that millionaires showed low responsiveness to the studied tax increases.

“At the most, migration accounts for 1.2 percent of annual changes to the millionaire population,” the study states. The remaining 98.8 percent of changes in California’s millionaire population is due to changes in income levels — the number of individuals attaining or losing millionaire status.

Using “difference-in-difference models,” the study’s authors contrasted migration trends of wealthy individuals immune from tax changes with a group of high-income earners who did experience the 2005 tax increase.

Their conclusion was that emigration did not increase due to the tax increases, and that indeed conventional wisdom was turned on its head: out-migration actually declined among millionaires after the tax’s passing. As the study states, “The highest-income Californians were less likely to leave the state after the millionaire tax was passed.”

Varner and Young created a census of California millionaires using income tax records from 1994 to 2007.

“California income tax records provide a virtual census of millionaires, and show when millionaires enter or exit the state,” the study reads. “These data offer a unique contribution to the policy discourse on state taxation of top incomes.”

“This new research dispels one of the most persistent myths about state tax policy,” said Chris Hoene, executive director of the California Budget Project, a Sacramento-based think tank, in a statement.

“With California voters turning their attention to the November ballot, this new research undercuts the claim by opponents of Proposition 30 that this measure’s personal income tax increase, which would largely affect the top 1 percent, will drive high earners out of the state,” he said.

The study also found that the out-migration rate for wealthy Californians who become divorced almost doubles in the year of divorce and remains elevated for two years after. The researchers argue that the demonstration of this known migration cause proves the validity of the income tax record research method.

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