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Could Prop. 30’s tax increase be the last straw for California’s high-income earners?

Proposition 30, on this November’s ballot, would increase state income taxes on Californians making over $2 million to finance additional electric vehicle charging stations and wildfire prevention programs.  The Legislative Analyst Office estimates that the additional tax would raise between $3.5 billion and $5 billion a year, which would be split across the zero-emission vehicle and wildfire prevention programs listed in the proposition’s summary.

Although LAO notes that “some taxpayers probably would take steps to reduce the amount of income taxes they owe,” it does not attempt to quantify any potential revenue losses.

Those affected by this measure, people with incomes of over $2 million annually, currently face a marginal tax rate of 13.3% in California. This income tax rate is higher than all other states’ maximum income tax rates. Hawaii has the second highest marginal state income tax rate of 11%. Some New York City taxpayers face a higher combined state and local income tax rate than their California counterparts, but New York state taxes are lower.

According to 2019 statistics from the California Franchise Tax Board, only 35,000 taxpayers reported adjusted gross income greater than $2 million. That year, those taxpayers had a cumulative tax liability of $27.3 billion, or 33% of the statewide total.

During the COVID-19 pandemic, outmigration from California increased as remote work became more common. Interestingly, according to data from moveBuddha, a moving company, the three states attracting the largest numbers of departing Californians in early 2022 are Florida, Texas, and Washington state. Those three states do not have state income taxes, though Washington does tax the capital gains of high earners.

Historically, California has retained most of its high-income residents due to its combination of superior weather, extensive business opportunities, and unparalleled social networks in the entertainment and technology industries. While many of these benefits remain intact, growing technology clusters in places like Austin and Miami are now more likely to compete for high-income Californians than in the past.

As the Legislative Analyst’s Office noted, it is impossible to predict how many high-income Californians may move out of state if Prop. 30 passes. On the one hand, an extra expense of 1.75% on a certain portion of a millionaire’s income may be seen as a relatively minor cost that would not drive a significant decision to relocate. But, for some, the tax hike could be the last straw, pushing some families already considering relocation to go forward with their plans to leave California.

Outmigration of high-income taxpayers would not only cut into the state’s marginal income from Prop. 30’s 1.75% tax increase those individuals would have paid, but it would also cause the state to lose the rest of the income tax they were previously paying.

Consider, for example, a married taxpayer filing jointly and reporting $5,000,000 of adjusted gross income. In 2021, the taxpayer would have incurred a state tax liability of $582,739. Had the Prop. 30 tax been in place, they would have paid an additional $52,500 toward just electric vehicle charging infrastructure and wildfire protection.

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