Wait, California Has Lower Middle-Class Taxes Than Texas?
Ultra-high earners can cut their tax bills a lot by moving
from a high-tax state to a low-tax one. For most other people, that's not at
all a sure thing.
By Justin Fox
May 19, 2021, 6:00 AM EDT
A tale of two tax rates.
A lot of people left California for other states over the
past decade, with 912,038 more going than coming from 2010 to 2019, according
to Census Bureau population estimates. Who was leaving? Mainly those without
college degrees and with middle to lower incomes, the Public Policy
Institute of California calculated recently on the basis of a different Census
Bureau data set. Here’s the breakdown by income:
I would not take this to mean that all is well with the
state. An exodus of people with lower and middle incomes is not a good thing,
and the net inflow of those with higher incomes slowed over the course of the
decade. The data also don’t cover the upheavals of 2020, and there’s
statistical evidence that out-migration from California accelerated last year
as well as lots of anecdotal evidence that high-income people were among the
emigrants.
These statistics are relevant, though, to any discussion of
why so many people have been leaving California. Taxes often dominate public
discussions of such trends, thanks in part to the unrelenting efforts of
Republican policy entrepreneurs Arthur Laffer and Stephen Moore, whose 14th
annual, mostly tax-based economic competitiveness report for the conservative
American Legislative Exchange Council is out this month. But it’s awfully hard
to argue that taxes have been the main thing driving the California exodus,
given that (1) it has been concentrated among the less affluent, (2) their No.
1 destination has been Texas, according to 2010-2018 Internal Revenue Service
data that I tallied up early last year and (3) lower-income and
middle-income people face higher effective tax rates in Texas than in
California.
Middle-class taxes are lower in Nevada, the No. 2
beneficiary of net migration from the Golden State, but for a household at the
2019 California median income of $75,235 the 1.8 percentage point difference in
effective tax rate adds up to $1,354 whereas the difference in average
annual rent for an apartment or house between metropolitan Los Angeles and
metro Las Vegas is $6,336, according to Apartment List’s April
estimates.
For those in the top 1% of the income distribution, who in
California in 2018 had adjusted gross incomes that started at $680,687 and
averaged $2.2 million, the story is much different.
These estimates are from 2018 because that’s the last time
the Institute on Taxation and Economic Policy, a left-leaning Washington think
tank, updated its distributional analysis of state and local tax systems, a
massive “microsimulation” exercise that “relies on one of the largest databases
of tax returns and supplementary data in existence, encompassing close to three
quarters of a million records.” The right-leaning Tax Foundation recently
published its estimates of the 2019 state and local tax burden, and one can get
a rough accounting of the 2020 take by comparing the Bureau of Economic
Analysis’s state personal-income and disposable-personal-income numbers, but
neither of those gives any indication of how taxes vary by income group. So
ITEP’s 2018 estimates are what we’ve got to work with.
California’s tax
rates for high earners were the country’s highest in 2018, and the tax-rate
differences between states were bigger for high earners than for middle-income
taxpayers. Also, because the incomes involved are higher, the tax bills are
bigger relative to real estate costs. The 9.4 percentage point difference
in top-earner tax rates between California and income-tax-free Washington, the
No. 3 recipient of California net migration and one that welcomed people with
higher incomes than those headed to Texas and Nevada, works out to $210,443 for
the average California one-percenter, while the difference in annual rents for
a four-bedroom dwelling (not the perfect metric, I realize, but it’ll do)
between metro San Francisco and metro Seattle is $7,320.
Changes in the last few years have made such tax differences
loom even larger for those with very high incomes. The 2017 Tax Cuts and Jobs
Act increased interstate variance in affluent people’s tax bills because those
who face high state and local taxes are no longer able to deduct most of them
for federal tax purposes. Then the sudden move to remote work during the
pandemic brought a sharp rise in residential mobility among high-income
workers, according to an Apartment List survey. Most of these moves were
within the same metropolitan area, but the barriers to moving across state
lines to avoid taxes have definitely been lowered. Also, New York has just
passed a law that will likely make its top earners the country’s highest-taxed,
surpassing California.
There are good reasons for states to care about the tax
incentives facing one-percenters. In
California and New York, they account for close to half of state personal
income tax revenue. If too many leave, state finances could be hammered. A
recent study by economists Joshua Rauh of the Stanford Graduate School of
Business and Ryan Shyu of Amazon.com found a “substantial one-time out-migration
response” to a 2012 increase in the state’s top income tax rate, concentrated
among those making more than $2 million a year, and concluded that the
departures had eroded at least 60% of the revenue gains from the tax hike.
Rauh and Shyu also speculated that the impact of the changes in relative tax
rates among states brought on by the 2017 federal tax law would prove even
larger.
On the other hand, income tax revenue kept rising briskly
through the pandemic in both California and New York. California now has a
$75.7 billion budget surplus! An exodus of the rich may turn out to be a big
problem, but it isn’t one just yet. Meanwhile, these two states have been bleeding
poor and middle-class residents for years. High real estate costs are one big
reason. Another is what Massachusetts Institute of Technology economist
David Autor calls “The Faltering
Escalator of Urban Opportunity”: Wages used to be much higher in big cities
(California and New York are home to the biggest) regardless of where you were
on the education or income spectrum, even adjusted for the higher cost of
living. This is still quite true for
college-educated workers, Autor has documented, but not for those with some
college or less.
I don’t want to completely discount the role of taxes in the
migration patterns of the non-wealthy. There’s a swath of 13 states stretching
from Kansas to Connecticut with effective state and local tax rates on middle
incomes of 10% or more and net domestic out-migration from 2010 to 2019. 1 Then
again, two of the four states with the lowest middle-income tax rates, Alaska
and Wyoming, experienced out-migration as well. Taxes matter, especially at the high end, but for most people other
things matter more.
Kansas, Nebraska, Iowa, Wisconsin, Illinois, Indiana,
Kentucky, Ohio, Pennsylvania, Maryland, New Jersey, New York and Connecticut.
This column does not necessarily reflect the opinion of the
editorial board or Bloomberg LP and its owners.
To contact the author of this story:
Justin Fox at justinfox@bloomberg.net
To contact the editor responsible for this story:
Susan Warren at susanwarren@bloomberg.net
No comments:
Post a Comment