Charles Varner, of the Stanford Center on Poverty and Inequality, has recently released some interesting research documenting the results of a recent tax hike for Millionaires in California. Our tax attorneys in San Jose reviewed the research and found that Charles Varner suggests that Proposition 30 ended up producing the opposite results that governor Jerry Brown was hoping to accomplish in the State’s loss of 138 high-income individuals. Varner’s paper updates a previous one written in 2004 in response to a tax hike and its effect on migratory rates to and from the state of California. Varner felt that an update on the results was necessary as the 2012 tax hike is the highest state tax increase the United States has seen in over 30 years.
In 2012, governor Jerry Brown and the voters passed Prop. 30 which increased the highest income tax rates by 3 percentage points: 10.3 to 13.3 percent. This raised the state’s top income tax rate by 29 percent, making it the nation’s highest state income tax rate to date. Prop. 30 also increased the tax rate on high incomes between $300,000 and $500,000 by two percentage points, which equates to a 21.5 percent increase. The rate on even higher incomes between $500,000 and $1,000,000 was raised by three percentage points, equating a rate hike of more than 32 percent. These income tax increases will be around for longer than originally intended as 2016 voters extended the expiration of the increases from 2019 to 2030. It is predicted that the tax hikes will be extended even further before their 2030 expiration date hits.
In-Migration Results Pre and Post Prop. 30
Varner’s research found that in the two years leading up to Prop. 30, net in-migration rates for taxpayers affected and not affected by the upcoming tax hikes was both positive and regular. Post Prop. 30, net in-migration rates decreased for households with an increase in taxes by 0.5 percent or more. According to Varner’s research, the higher the tax hike, the bigger the drops for in-migration rates.
Maryland Millionaires Tax Hike of 2008
Attempts to fix a state’s budget deficit by draining the rich through increasing taxation rates is not exactly a new thing. In 2008, then governor and democratic presidential candidate Martin O’Malley imposed an income tax rate increase of 6.25 percent on Maryland’s millionaires; it produced similar results. A Wall Street Journal Editorial reported on the effects of the tax increase a year later which included Maryland losing one-third of its millionaires and a drastic decrease in the filing of million-dollar tax returns from 3,000 in 2008 to 2,000 in 2017. The point is that while the initial income tax hike was expected to line the state coffers with $106 million, millionaires paid $100 million less in taxes by leaving the state. So even with higher tax rates, the rich are actually paying less as they are more than capable of fleeing the state and re-establishing themselves in another state that does not fleece the rich with tax hikes. A further result of this is that with the failure to drain the rich, the responsibility to ease the state’s overspending deficit now falls on the middle class.
When it comes to the increase in migration rates of people leaving the Golden state, our tax attorneys surmise that other factors like increasing housing rates likely play a role as well. One thing that seems certain is that the state of California’s tax burden is only on the rise, and the fleeing millionaires and those leaving due to exorbitant housing costs are bound to have a drastic effect on the state’s economy and social landscape.
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