California Study: Tax Millionaires, They’ll Just Grin and Bear It

October 31, 2012

That’s according to the Los Angeles Times and about a dozen other media sources, which are touting a new study that shows millionaires will not move, even if taxed at prohibitive rates. Using data from the 2005 millionaire tax hike in California, sociologists Varner and Young find that top income tax rates have little to do with millionaire migration, and that in general, the overall economy is the main driver of high income earners’ movement. The L.A. Times article regretfully did not mention evidence from the 2008 Maryland episode where one third of millionaires no longer filed after a millionaire’s tax was instituted there, or even Varner and Young’s 2011 study on New Jersey which does show some out-state migration in response to progressive tax hikes, especially among retirees and other demographics which are, well, more mobile.

Those caveats aside, the Varner and Young results may very well be valid as an explanation of California’s 2005 episode. It is highly likely that California, with its attractive climate and natural resources, creates a captive tax base, meaning most high-income earners will not move unless taxes become punitive. As Young notes in the column, "moving away is the toughest and most costly response to a tax increase."

But soak-the-rich types should not be too quick to declare victory, as this is probably the exception rather than the rule. I’m pretty confident that if South Dakota—which is not known for its weather—introduced a highly progressive income tax scheme like California, they would see a swift exodus of high-income earners.

It’s important to remember that taxes are a cost like any other, and they matter at the margins. It is worth noting that when people do make the costly and life-changing decision to move, they tend to move to states with better tax systems like Florida and Texas.

Finally, there are tax equity concerns to be addressed here. The moral of the Varner and Young story seems to be that we can tax high-income earners at disproportionate rates and they won’t react, because they are captive to the region for some reason, whether it’s family, weather, or their employment. Even though they will pay it, do we really want to single out a small group of the population and force them to pay a disproportionate share of the cost of government?

Check out our interactive migration calculator here.

Follow Scott Drenkard on Twitter @ScottDrenkard.

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