California's High Taxes Are Driving The Wealthy Away

Bloomberg Op-Ed:  California's High Taxes Are Driving The Wealthy Away, Tyler Cowen (George Mason; Google Scholar):

Some Americans like to mock France and Sweden for their high taxes. Yet California — whose economy is bigger than that of both countries — has comparable tax rates, when federal and state tolls are combined, and a new study suggests that they are causing some top earners to leave the state entirely [Joshua Rauh (Stanford; Google Scholar) & Ryan Shyu (Stanford), Behavioral Responses to State Income Taxation of High Earners: Evidence from California, 16 Amer. Econ. J. 34 (Feb. 2024)].

This is an issue for more than America’s 39 million Californians. Despite the long-held consensus among many analysts that state-level tax rates don’t matter much, some states seemed to have reached a point at which tax rates are driving many residents’ decisions. That raises the question of whether taxes can continue to rise without significant negative economic consequences. ...

How are residents fighting back? In part by leaving. California had a net population loss of more than 700,000 from April 2020 to July 2022. Some of that was likely pandemic-driven, but the trend has not reversed.

And higher taxes are playing a role. Researchers Joshua Rauh and Ryan Shyu, currently and formerly at Stanford business school, have studied the behavioral response to Proposition 30, which boosted California’s marginal tax rates by up to 3% for high earners for seven years, from 2012 to 2018. They found that in 2013, an additional 0.8% of the top bracket of the residential tax base left the state. That is several times higher than the tax responses usually seen in the data.

These high-earning California residents seem to have reached a tipping point: Maybe many of them could afford the extra tax burden, but at some point they got fed up, read the signals and decided the broader system wasn’t working in their interest.