Exporting Wealth

On April 24, The Los Angeles Times ran an article with ominous implications for California’s lawmakers. The article about migration to and from California was accompanied by an interactive map created with data from state tax returns for 2005. The map graphically shows that California is forcing our talented high wage earners to self-exile by moving to states with friendlier tax policies.

How bad is it? In 2005, 274,278 tax returns representing close to $14-billion in income left the state. They were replaced by 202,361 tax returns generating about $9.4-billion in income. The household income of those who left the state was about 9% higher than those who moved in from elsewhere. By becoming former California residents, they knocked an annual hole of about $500-million in the state budget — and that’s from only one year’s impact.

Where are these former Californians going? Without exception, to states enjoying a better business climate than California, according to the Tax Foundation a 70-year-old nonpartisan tax research group based in Washington, D.C. The tax foundation scores California as being the 45th most difficult place to do business of the 50 states and the District of Columbia. Our Western neighbors enjoy far better business climates, with Nevada being 4th, Oregon 10th, Washington 11th, Arizona 28th, and Idaho 32nd.

Not surprisingly, every state that is attracting significant numbers of former, high wage Californians has a better business climate than California. Conversely, California is drawing high wage tax refugees from the Northeast, especially New York and New Jersey which, not surprisingly, have business climates that rank lower than California’s at 47th and 48th, respectively.

So, we can see that California’s tax policies drive the most productive Californians to move to states with friendlier tax policies while the few states with even worse tax policies than California export their best and brightest to California.

What are the implications of California’s tax and regulatory policies? More so than most every other state in America, California heavily relies on its most productive members of society to carry the burden for the state’s burgeoning social spending. This is because California has, according to the Tax Foundation, the highest individual income tax rate and, “…one of the most highly progressive (tax) structures in the nation… Since most small businesses are S Corporations, partnerships, or sole proprietorships, they pay their business taxes at the rates for individuals. That makes California’s taxes on small businesses some of the most burdensome in the nation.”

In 2004, only 0.4% of tax filers, or 37,837 returns with adjusted gross income of more than $1-million paid $10.8-billion in taxes equaling 30% of California income taxes. The top 1% paid 42.7% of income taxes, up from 38.8% in 2003; the top 5% carried 64.3% of the income tax burden.

Google went public in 2004 resulting in a one-time tax windfall last year from only 14 insiders that generated $450-million in California capital gains taxes. They were joined by hundreds of lower level employees who also saw capital gains and paid heavily for the privilege of receiving those gains in California. Had they lived in Nevada, their tax would have been zero because Nevada has neither an income tax, nor a business tax.

In essence, California’s tax policies are serving to drive out the very taxpayers it relies on to pay the bills for the welfare state.

Liberal lawmakers cannot have it both ways: they can try to build up the poor by tearing down the rich with a highly progressive tax structure (the rich then simply move away), or they can encourage wealth generation in California to boost state revenues for the benefit of all. For many Democrats “soaking the rich” may feel satisfying — until the targeted taxpayers refuse to cooperate by leaving the state, taking all their taxable income with them.