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Why State Taxes Matter

Killing the Goose That Lays the Golden Egg?

By Joshua D. Rauh and Jillian Ludwig

Headlines have announced that many wealthy individuals and businesses are fleeing California. Those with the highest profile have been Elon Musk with Tesla and Larry Ellison with Oracle. According to recent data, 2020 was the first year since 1900, when such information began to be collected, in which California’s population declined. Even so, the idea that the wealthy are leaving California has primarily relied on anecdotes rather than systematic evidence, and the actual costs to the state and its tax base of these departures has been unknown.

In a new paper, we use data directly from California state tax filings to study how migration has varied across tax brackets over the past two decades. Reports of overall population decline are cause for concern, but for the economy, it matters whether the outflow is in fact driven by higher-income or lower-income taxpayers. While an overall population loss is problematic, one where high-income citizens are leaving at a particularly high rate translates more quickly into reduced public resources and contracting economic activity, given the relatively large share of income earned by, and taxes paid by, high earners. Declines in population driven by high earners mean reduced tax revenues for Sacramento, and reduced job opportunities for middle- and lower-income Californians who are less mobile.

So, what is responsible for this decline? While California’s high tax burden has been a prime suspect, there are other potential culprits: some of the highest housing costs in the nation, an inhospitable regulatory environment for businesses, comparatively poor-quality public services, and so on.

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