Fake News: Millionaires flee California because of high taxes

by Dr. Eowyn

You may have seen reports of millionaires fleeing California because of tax increases on the wealthy. An example is an article by Steve Straub in The Federalist on July 6, 2018, in which Straub claims a direct cause-and-effect relationship between Prop. 30 and millionaires leaving the state:

According to new research released by Charles Varner, associate director of the Stanford Center on Poverty and Inequality, California lost an estimated 138 high-income individuals following passage of the Proposition 30 income tax increase championed by Gov. Jerry Brown (D) and approved by Golden State voters in 2012….

Prop. 30 raised the state’s top income tax rate by 8%, increasing it one percentage point from 12.3% to 13.3%, which is now the highest state income tax rate in the nation. Prop. 30 also hiked the tax rate on income between $300,000 and $500,000 by two percentage points, and raised the rate on income in excess of $500,000 by three percentage points.

In 2016, California voters extended the Prop. 30 income tax increases, which were originally scheduled to expire in 2019, until 2030. There will be an effort to extend those income tax hikes yet again prior to their expiration in 2030; book it now.

Varner’s new research examined taxpayers who were and were not hit by the Prop. 30 rate hikes. He found that in the two years before the Prop. 30 tax hike was imposed (2011 and 2012), net in-migration for both groups “was positive and roughly constant.” Yet following 2012 and the passage of Prop. 30, net in-migration dropped for households that were facing an effective tax increase of 0.5 percent or more. The reduction was greatest for households facing the highest effective tax hike, according to Varner and his coauthors, who include Allen Prohofsky of the California Franchise Tax Board….

Who could have ever predicted that raising taxes on the wealthy, higher than any other state in the country, would drive them out of the state?

Notice that nowhere in his article does Straub provide a link to his source — that study by “Charles Varner, associate director of the Stanford Center on Poverty and Inequality” — which is always cause for suspicion.

Nor does The Federalist enable reader comments on Straub’s article, which means I can’t even notify The Federalist if Steve Straub is mistaken — which he turns out to be.

So I went looking on the web for the original source.

I could not find this study on the website of the Stanford Center on Poverty and Inequality, but I did find a news release by the Stanford Center on Poverty and Inequality (SCPI) which says just the opposite of what Straub claims. Not only is the much-touted “millionaire migration” from California “simply a myth,” migration in and out of California has nothing to do with taxes.

The research was conducted by these two individuals at the request of the California Board of Equalization, allowing them unique access to California Franchise Tax Board income data:

  • Cristobal Young, an assistant professor of sociology at Stanford.
  • Charles Varner, then a doctoral candidate in sociology at Princeton University.

The SCPI news release states:

Embroiled in the California debate over Proposition 30‘s progressive income tax proposals, some politicians have argued that raising taxes on the highest earners will drive them to states with lower tax rates, taking businesses and jobs with them.

But a study released by the Stanford Center on Poverty and Inequality concludes that “millionaire migration” is simply a myth.

The reason the number of California millionaires varies from year to year has almost nothing to do with taxes, the researchers found. Instead, the numbers change as incomes fluctuate, most likely because investments are sensitive to market cycles.

Varner and Young looked at millionaire migration after California’s 2005 Mental Health Services Tax was enacted, as well as after state tax cuts in 1996.

They found that millionaires did not flee as a result of the tax increase (in fact, more millionaires moved into the state than out during that period), nor did millionaires from elsewhere move to California as a result of the tax cuts….

What could account for the fluctuations in California’s millionaire population? According to the study, it’s not due to tax changes or rich people leaving the state. Almost all of the fluctuation comes from income dynamics at the top, with taxpayers falling into and out of the millionaire income bracket as their income rises and falls across the million-dollar mark from year to year.

The temporary nature of such high earnings may help explain why the additional taxes in the study didn’t cause a noticeable flight of millionaires.

Personal connections seem to weigh more heavily than tax rates in deciding where to take up residence. “People are tied to states for different reasons,” Young said. “They don’t want to take their kids out of school, they want to stay connected with friends, with families … with business contacts.” People crowd together, from Silicon Valley to New York City, because of the returns associated with collaboration, he said….

Young added that looking at the tax flight issue only scratches the surface of state financial woes. “People need to think about the depth of California’s budget problems,” he said. “I think there’s much, much bigger things to worry about than this issue of tax flight because it’s really hard to find any evidence of it.”

Even more curious is the fact that the embedded links to the Young-Varner study in the SCPI news release don’t work. When you click the words “study” and “Stanford Center on Poverty and Inequality” in the phrase “a study released by the Stanford Center on Poverty and Inequality,” you get this message:

Object not found!

As Alice in Wonderland would say, “Curiouser and curiouser!”

I finally found a link to the elusive study by Young and Varner in a July 6, 2018 article by Patrick Gleason for Forbes, in which Gleason repeats The Federalist‘s claim that millionaires flee from California because of tax hikes:

According to new research released by Charles Varner, associate director of the Stanford Center on Poverty and Inequality, California lost an estimated 138 high-income individuals following passage of the Proposition 30 income tax increase championed by Gov. Jerry Brown (D) and approved by Golden State voters in 2012.

The only problem is that is simply not what the authors of the study actually wrote.

From Charles Varner and Cristobal Young, Millionaire Migration in California: The Impact of Top Tax Rates, 2012, pp. 2-4:

California is one of eight states that have established a “millionaire tax” in recent years. The popular appeal of these taxes is that they raise revenue from those seen to have greater ability to pay a higher rate on the highest portion of their incomes. The concern, however, is that millionaire taxes may lead to millionaire migration, with potentially serious loss of revenues for the state.

This study addresses the following key question: Do changes in California’s top income tax rates lead to changes in the migration of top incomes? . . . .

The authors summarized their findings, denying that there is a “millionaire migration” from California or and that this non-existent migration is due to taxes:

1. Migration is a very small component of changes in the number of millionaires in California. While the millionaire population sees a typical year-to-year fluctuation of more than 10,000 people, net migration sees a typical year-to-year fluctuation of 50 to 120 people. At the most, migration accounts for 1.2 percent of the annual changes in the millionaire population. The remaining 98.8 percent of changes in the millionaire population is due to income dynamics at the top – California residents growing into the millionaire bracket, or falling out of it again.

2. Using difference-in-differences models, which compare migration trends of the group experiencing the tax increase to a group of high-income earners not facing a tax change, neither in-migration or out-migration show a tax flight effect from the introduction of the 2005 Mental Health Services Tax. In fact, out-migration has a “wrong-signed” estimate: out-migration declined among millionaires after the tax was passed (both in absolute terms and compared to the control group). In other words, the highest-income Californians were less likely to leave the state after the millionaire tax was passed . . . .

4. The 1996 tax cuts on high incomes likewise had no consistent effect on migration. There was a small effect for those experiencing the small (0.7%) tax cut, but no effect at all for those experiencing the large (1.7%) rate cut. While we are planning to analyze the 1996 tax cut in greater detail, the overall picture is one of no clear effect.

Instead, what the study found was that whatever “millionaire migration” there is is due to personal factors, specifically divorce:

There is a strong out-migration effect for high-income earners who become divorced. In the year of divorce, the migration rate more than doubles, and remains slightly elevated for two years after the event. This shows that there are circumstances that do generate millionaire migration. The tax policy changes examined in this report are very modest compared to the life-impact of martial dissolution.

The authors’ explanation for why California millionaires don’t flee because of the state’s high taxes is this:

Most people who earn $1 million or more are having an unusually good year. Most “millionaires” earned less in years past, and they are not likely to earn this much again. A representative “millionaire” will only have a handful of years in the $1 million + tax bracket. The somewhat ephemeral nature of very high income is one reason why the top-income taxes examined here generate no observable tax flight. It is difficult to migrate away from an unusually good year of income.

To conclude, the Stanford study cited by countless conservative bloggers and writers as showing millionaires fleeing California because of high taxes, actually says just the opposite — millionaires are not leaving California, nor are they fleeing because of the state’s punitively higher taxes on high-income earners.

In other words, what those articles in The FederalistForbesNewsMax, and blogs such as Lucianne.com report is FAKE NEWS.

It really does not serve the cause or interests of conservatives to distort the truth.

~Eowyn

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