Introducing his state budget proposal earlier this month, California Governor Jerry Brown said out loud what many legislators in Sacramento fear: That California’s highly progressive income tax may be unsustainable in the wake of the Republican tax bill signed in December by President Donald Trump.
“People with higher incomes pay a lot more money, and some of them may be tempted to leave,” Brown said.
California is unusually reliant on income tax to fund the state’s $183 billion budget. And almost half of state income taxes are paid by the wealthiest 1 percent of earners, for whom the top marginal rate is 12.3 percent, with an additional 1 percent charge on incomes over $1 million.
Most people in this group should benefit directly or indirectly from the cuts in individual and corporate rates in the Republican federal tax legislation. But the law also limited deductibility of mortgage interest and of state and local taxes, effectively transferring billions from wealthy taxpayers in high-tax blue states to wealthy individuals in low-tax red states. According to one study, about 38 percent of Californians in the top 1 percent, earning more than $877,560, will pay higher taxes under the GOP plan, as will about one quarter of upper-middle-class Californians earning from $130,820 to $304,630.
State legislative efforts under way in California, New York and elsewhere to work around the new law are complicated, legally shaky and seem unlikely to succeed. Thus Brown’s concern that high earners will leave the state, undermining both its budget and economy.
A 2016 study by researchers from Stanford University and from the U.S. Treasury Department suggests the fear might be overblown — at least regarding the very wealthiest taxpayers.
“Income earning capacity derives not just from individual talent and human capital (which is movable) but also from place-based social capital — social and business connections to colleagues, collaborators, funders, and co-founders,” the researchers wrote. “Elites are embedded in the regions where they achieve success, and they have limited interest in moving to procure tax advantages.”
Spouses with jobs, and children with school ties, further raise the costs of migrating to low-tax states. Single people migrate at almost twice the rate of married people. About 90 percent of millionaires are married, compared with about 58 percent of the general population. And half of millionaires have kids at home.
Florida, which has no state income tax and plenty of pretty coastline, appears to be the only real magnet to millionaires from high-tax states. “Other low-tax states, such as Texas, Tennessee, and New Hampshire, do not draw away millionaires from high-tax states,” the report said.
It’s unclear what the breaking point would be for California millionaires. Hollywood has been spreading production around the country, but executive offices and ancillary industries such as talent representation are still concentrated in Los Angeles. The tech industry in Silicon Valley has enticing alternatives in Utah, Texas and elsewhere. But Google, Apple and other elite companies seem to believe that Northern California holds unique value.
While millionaires are inclined to stay put, the stress point may be significantly lower for the merely affluent, who have less of a cushion against higher taxes and the state’s already high cost of living. Upper-middle-class taxpayers may be the real source of vulnerability for California.
There’s no good way to reimburse such taxpayers on the higher taxes they’ll pay to the federal government. And unlike paying higher taxes to strengthen the safety net or build infrastructure or improve education, there’s no psychic benefit to paying more so that people far wealthier than yourself can pay less.
Two New Yorkers who represent affluent House districts, Democrat Nita Lowey and Republican Peter King, have proposed restoring the full federal deduction for state and local taxes. But there’s no reason for Republican leaders in Washington to consider it. The GOP’s goal all along was to “redistribute the tax base from blue to red states in a move that’s nothing less than a declaration of war,” as Melvyn Krauss, a senior fellow at the conservative Hoover Institution, wrote.
Even if Lowey and King somehow managed to succeed, their bill would be no blow against inequality. According to one analysis, two-thirds of its benefits, which would total $86 billion in 2019, would go to the richest 1 percent of households.
The only difference is this crop of one percenters would be in blue states. In the gold-leaf age of Trump, the federal government seems to redistribute money in only one direction: up. Unless you live in California or perhaps another state that conservatives love to hate.
Francis Wilkinson writes editorials on politics and U.S. domestic policy for Bloomberg View. He was executive editor of the Week. He was previously a national affairs writer for Rolling Stone, a communications consultant and a political media strategist.
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