Mercury News: Superrich stay put in high-tax states like California
media mentionBy Mike Rosenberg
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Posted: 10/01/2012 10:18:54 AM PDT
Updated: 10/01/2012 10:25:43 AM PDT
Some of us might love to hate ’em, but we need millionaires in California — or we’d lose tens of billions of dollars in tax revenue that pays for things like education and public safety. So should we be freaking out that rich people will flee the Golden State if we vote to hike their taxes by passing either Proposition 30 or 38 in November?
Maybe not.
An analysis by this newspaper of IRS tax-return data shows that states that charge high income taxes — from California to New York to New Jersey — are home to the highest number of rich people per capita. And two-thirds of the states that don’t charge any income taxes actually have fewer numbers of millionaire residents per capita, the analysis shows.
Consider Florida and Texas, which are often cited as havens for rich movie stars, CEOs and athletes because they are income-tax free. California, on the other hand, has the nation’s second-highest income tax rate.
So in those three states, how many people earn at least $1 million a year for every 100,000 taxpayers?
Florida: 202. Texas: 217. California: 252.
Over the past 15 years, California has maintained the same share of the nation’s ultrarich, even after voters passed the state’s first “millionaires’ tax” in 2004. That echoes the experience documented in studies of other states that have raised taxes on the wealthy.
“There just isn’t any persuasive evidence out there to make you think that there would be a significant number of Californians moving because of this tax change,” said Carl Davis, senior policy analyst at the Institute on Taxation and Economic Policy, a nonpartisan research group based in Washington D.C.
The issue of where our millionaires live, always a fun one to gossip about, is also increasingly critical to the state’s financial health as California tries to stave off cuts to classrooms and the poor. The wealthiest 1 percent of Californians — those Bentley-driving, mansion-living people who make about 50 times as much as us average folk — provide more than $20 billion in income taxes each year. That’s about one-fourth of the state’s general-fund budget — and could soon grow.
Proposition 30, sponsored by Gov. Jerry Brown, would increase the state sales tax by a quarter of a cent, costing the average person less than $100 a year. The bulk of the new revenue would come from raising the income tax on joint filers earning above $500,000 — and single filers who earn at least $250,000 — from 10.3 percent to as high as 13.3 percent. The extra tax would be in effect for seven years.
Civil rights attorney Molly Munger’s Proposition 38 would hit almost all income groups — but tax the rich the most. If both initiatives pass, the one with the most votes will take effect.
Polls show Proposition 30 is favored by slightly more than half of likely voters while Proposition 38 is struggling to gain majority support, though there are plenty of voters undecided on both measures. Each is designed to increase the amount of money California spends on education while helping to balance the general-fund budget.
More than two-thirds of the Bay Area Council’s executive committee — which includes dozens of rich people who would pay the higher tax, ranging from pro sports owners to corporate CEOs — voted to endorse Proposition 30.
“No one I spoke to said if this passes they’re going to up and leave the state,” said Jim Wunderman, the council’s CEO.
“California is the place to be if you want to be at the top of the game. There’s a price to be paid for that.”
Last year, Stanford University sociology professor Cristobal Young and Princeton University Ph.D. candidate Charles Varner found that a 2004 tax hike on New Jersey’s wealthy had zero impact on the number of rich people in the state.
“They place substantial investments in building businesses and social networks in these communities and a small, couple-percentage points of extra tax just isn’t in any way enough to prompt them to move out of state,” Varner said.
Proposition 30 opponents, however, point to anecdotal evidence of millionaires fleeing California and note that more workers overall have been moving out of the Golden State than into it over the past several years.
“At some point the tax and regulatory burden starts driving the decision” to move, said Jon Coupal, president of the Howard Jarvis Taxpayers Association and co-chairman of the No on 30 campaign. “I hear every day from people who say if Prop. 30 passes, it’s the last straw.”
Bay Area native David Friedman, president of Wealth-X, a global Singapore-based consulting firm focused on the ultrarich, said it depends on what profession the millionaire is in.
“Think about the venture capitalist who lives in Woodside: He’s not moving,” Friedman said. “But the person launching a new company will at least consider it.”
Rich people pay a federal income-tax rate of as high as 35 percent but a much lower rate, usually less than 10 percent, on state returns.
Some wealthy people like GOP presidential candidate Mitt Romney have avoided high federal taxes by earning most of their money through capital gains, which are taxed at a maximum rate of 15 percent. But in California capital gains are taxed at the same rate as wages.
Like other states, though, California has discovered that steep tax bills don’t seem to scare off the rich.
“There’s no empirical evidence that top income earners change states in response to tax increases of small magnitude like the one they’re talking about in California,” said Varner, the Princeton researcher. “There’s just an economic theory.”