TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, June 5, 2018

Chipotle Headquarters Move From Colorado To California Exposes Myth Of The Impact Of State Taxes On Decisionmaking

ChipotleLos Angeles Times:  The Myth About High State Taxes, by Michael Hiltzig:

Chipotle Mexican Grill provided its new chief executive, Brian Niccol, with the usual blandishments when it recruited him from Taco Bell back in February, including $3 million in guaranteed salary and bonus, another $1-million bonus upfront and $5 million in stock-based incentives.

But the best perk may have been the one not disclosed by the company until May 23: It’s moving its headquarters from Denver, where it’s been located for 25 years, to Newport Beach. ...

But it looks more like a personal gift to Niccol, who lives in Newport Beach. In fact, the relocation may even allow him to improve on the 20-minute commute he suffered through when he was CEO of Taco Bell, which is headquartered all the way over in Irvine. And he won’t have to uproot his family, which includes three school-age kids. That said, Chipotle’s relocation will cause countervailing problems for many of its 400 employees in Denver and New York offices, which will be closed. ...

But the really interesting aspect of Chipotle’s headquarters relocation is how it illuminates what goes into a major corporate decision. Among other things, it gives the lie to all that guff you’ve been fed about taxes being a crucial consideration. ...

Policy wonks, especially on the conservative side, make heavy weather over state taxes as a competitive factor. The “economic competitive index” conjured up by conservative economist Arthur B. Laffer for the American Legislative Exchange Council (ALEC), a right-wing policy advocacy organization, lists 15 factors by which to judge the pro- or anti-business leanings of states. Ten are keyed to state taxes, based on the assumption that lower taxes make a state more competitive for business. ...

Yet the evidence for the impact of tax cuts on economic growth is all on the other side. With a rise in gross domestic product of 3% in 2017, California was one of the nation’s fastest-growing states — faster than the low-tax states of Texas (2.6%), Florida (2.2%), Wisconsin (1.7%) and Kansas (-0.1%). Kansas, which then-Gov. Sam Brownback tried to turn into a tax-cut paradise using the ALEC prescription, had the distinction of being one of only two states to turn in negative growth last year; the other was Louisiana, which like other big-oil states was still suffering a hangover from the oil bust of 2015-2016.


California’s job growth since the beginning of 2011, when Jerry Brown took office as governor and moved to raise income taxes for high-income residents, has easily outstripped that of Kansas, Wisconsin and the nation as a whole.


By the way, Laffer’s economic competitiveness index ranked California fifth worst in the nation for “economic outlook” in 2016, well below Wisconsin (ranked 9th) and Kansas (27). ...

Had Chipotle’s Niccol ranked his tax burden as a major factor in deciding where to hang his CEO’s hat, he would have kept the company in Denver. Colorado’s personal income tax is a flat 4.63%. California is the poster child for the so-called millionaire’s tax: Its marginal rate for income over $1 million is 13.3%. ...

The idea that taxes — especially millionaires’ taxes — play a preeminent role in where wealthy persons decide to live and corporations decide to locate is an enduring myth. It’s been fueled by a single endlessly recited case, the 2015 move of hedge fund billionaire David Tepper to Florida from New Jersey. (“Ladies and gentlemen, if you tax them, they will leave,” then-New Jersey Gov. Chris Christie subsequently warned legislators in threatening to veto a tax increase.)

MythBut a myth it is. “Out of the hundred different things that influence where wealthy people live and work, taxes are on the list but they play a very small role,” says Cristobal Young, a Stanford sociologist who has examined the evidence on “millionaire tax flight” and found it wanting. “Other factors that matter more are the location of family, friends, colleagues, co-workers and clients.” ...

In examining Internal Revenue Service tax return data from 1999 through 2011 for households reporting more than $1 million in annual income, Young found that when millionaires move, they tend to move from higher-tax to lower-tax states; but the overall magnitude of emigration was small and had little effect on the millionaire tax base. ...

[R]icher, more accomplished persons relocate chiefly to find opportunity. Once they’ve launched their careers in California, they’re loath to leave.

“Most people paying the top tax rate in California are typically at the peak of their career,” Young told me by email, “and made the decision about where to live, work and raise a family decades ago. People are very mobile when they are fresh out of college, but once they settle into career and place, hardly anyone is moving anymore.”

He adds that California’s relatively large tax burden on the wealthy has been a tradition dating back decades: “When taxes on high-income earners were first established in California, movies with sound were called ‘talkies’ and the famous L.A. sign read ‘Hollywoodland.’… People who argue that the rich are leaving California because of high taxes really have a lot of explaining to do.”

The facts seem to indicate that what corporate decision-makers value most in deciding where to live and work has more to do with quality of life and breadth of opportunity than with the size of their tax bill; the question boils down to whether the state has enough money to support the services they treasure, or whether it systematically impoverishes those services.

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" gives the lie to all that guff you’ve been fed about taxes being a crucial consideration." -- When a journalist with a left-wing agenda takes the low road of saying that experts with better analyses are "liars," then he's really short on support for his own position.

Posted by: Woody | Jun 5, 2018 3:50:24 PM


Posted by: Allan | Jun 5, 2018 4:07:57 PM

The only firm conclusion you can draw from this story is that it's time to short Chipotle stock.

Posted by: Douglas Levene | Jun 5, 2018 10:30:00 PM

Defy the “Myth”. Good advice to ANY state that can subcontract its weather to Southern California, hopes that perverse Principal-Agent conflicts continue to trump corporate economics, gets to pick its “policy accountability” time frame(a) as journalists with an ax can, and is prepared to keep on defying the “myth” by continuing to raise taxes to deal with the volatility of individual income tax receipts.

Posted by: MG | Jun 6, 2018 4:01:28 AM

“Among other things, it gives the lie to all that guff you’ve been fed about taxes being a crucial consideration.”

Whatever you say, lib. Keep it up if you’re so sure. : )

Posted by: Anon | Jun 6, 2018 7:43:33 AM

One example of a corporate office relocating to CA undoes the whole idea that companies are moving out of CA. Maybe it would be a good idea to look at the actual companies that left vs the ones that arrived.

Posted by: Eric DiBella | Jun 6, 2018 8:10:55 AM

As John Adams once said, "facts are stubborn things." None of the right-wing commenters disputes any of the facts in the story. It's just that the story was written by a left-wing lib and it unsettles the anti-tax blather.

Posted by: Publius Novus | Jun 6, 2018 8:23:07 AM

This is the same company that recently saw its stock price plummet after multiple salmonella outbreaks, right? Seems like an odd example to tout as a "brilliant corporate decision maker."

Posted by: Lonnie | Jun 6, 2018 9:15:22 AM

Maybe you could read the entire article? There's a lot more there, including what some might consider evidence.

Posted by: Matthew Bruckner | Jun 6, 2018 11:43:17 AM

Publius Novus, as a logical thinker, not just a "right-wing commentor," I dispute the selective example and flawed analysis. Do I have to go point-by-point for you, other than the author's desperate name-calling, and do you really have some problem doing an internet search yourself of companies that have left California over taxes and regulations to see a trend?

Posted by: Woody | Jun 6, 2018 11:54:55 AM

Ancedotes aren't evidence. This is like disputing the fact men are on average taller than women by pointing to a personal acquittance who is a female college basketball player. Similarily, pointing to multiple taller women would be worthless. The plural of ancedotes is not data. It's childish in the extreme. Extraordinary claims like this require far more powerful emperical data than anything provided here.

Posted by: The Woke One #metoo | Jun 6, 2018 1:02:46 PM

Maybe, maybe not.
Chipotle's net income in 2017 was $176 million. As a working schlub, I'd be happy to have a company doing that well. But it's five-year trend is not wonderful (2013: $327 M; 2014: $445 M; 2015: $476 M; 2016: $23 M). Maybe there’s an explanation (particularly for 2016!). But Chipotle itself seems far less robust than it once was.

Posted by: Curmudgeonly Ex-Clerk | Jun 7, 2018 7:37:21 AM


Probably doesn't help that there are now innumerable and largely indistinguishable casual burrito-type chains all over the place competing with Chipotle.

Posted by: Unemployed Northeastern | Jun 7, 2018 3:47:25 PM

I wonder if any of Mr. Hiltzig's books rely on a single, brave outlier data point as the fulcrum to stand in the face of decades of economic and tax research (and common sense). We should listen to clearly more knowledgeable Mr. Hiltzig and raise the individual rates to 90% because if there is a lesson I have learned from this "cogent" analysis is that if a relatively large amount of tax (California compared with the other 49 states) is good for business, then even more tax is better. Maybe if California raises state taxes to 25% they can bring back Nestle, Nissan, Toyota, and Jamba Juice. I think those companies have learned how cool high taxes are now thanks to Chipotle's shining example.

Posted by: King Charlemagne | Jun 7, 2018 5:20:58 PM

Publius: "None of the right-wing commenters disputes any of the facts in the story."

I dispute the conclusion, namely that corporate tax liability isn't an incentive or disincentive in the private sector.

They announced this move AFTER their federal tax rate was reduced. Chipolte will still save more money even though California has a marginal tax rate about twice that of Colorado.

And there are other reasons for the move, as the local Denver newspaper pointed out:

"New leadership, new initiatives like drive-through service, and a new home near other fast-food chains in southern California all signal a major cultural shift is underway, observers said."

They're also not relocating everybody to California. The tax burden is high, but the cost of living is even higher. That's why middle class households have been moving out of the Golden State.

I make around median income as a resident of the state, and my all-in effective tax rate is 25%. The property tax bill is higher than the state income tax bill, almost as high as the federal tax bill.

But for all the "good" news the author ascribes to California's high tax environment, I'll ask anybody:

Are progressive policies the reason California has the HIGHEST poverty measure in the entire country, right in front of Washington, DC?

Food for thought, for those who claim a monopoly on the facts...

Posted by: MM | Jun 7, 2018 7:21:37 PM

Meanwhile, Bechtel is formally moving its HQ from San Francisco to the DC area...

Posted by: Andy Patterson | Jun 8, 2018 7:18:07 AM

It only took a week for Seattle politicians to learn the lesson that corporations, do in fact, make location decisions with taxes as a major consideration. >> Seattle reverses course on business tax after Amazon pressure

Posted by: Woody | Jun 13, 2018 12:08:10 PM