California state taxes are too high and that is a problem

Among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 45.2% of the windfall tax revenues from the reform.

That is from a new NBER working paper by Joshua Rauh and Ryan J. Shyux.  Here is the full abstract:

Drawing on the universe of California income tax filings and the variation imposed by a 2012 tax increase of up to 3 percentage points for high-income households, we present new findings about the effects of personal income taxation on household location choice and pre-tax income. First, over and above baseline rates of taxpayer departure from California, an additional 0.8% of the California residential tax filing base whose 2012 income would have been in the new top tax bracket moved out from full-year residency of California in 2013, mostly to states with zero income tax. Second, to identify the impact of the California tax policy shift on the pre-tax earnings of high-income California residents, we use as a control group high-earning out-of-state taxpayers who persistently file as California non-residents. Using a differences-in-differences strategy paired with propensity score matching, we estimate an intensive margin elasticity of 2013 income with respect to the marginal net-of-tax rate of 2.5 to 3.3. Among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 45.2% of the windfall tax revenues from the reform.

You can file this one under Arthur Laffer: “these days definitely underrated.”


Caveat that I can't access the full paper without paying $5, is this correct? Perhaps it's just too easy to game residency status, or perhaps inaccurate tax reporting is the cause? Doesn't seem right to me, but I'm not paying the $5 to learn.

Some people can geniunely alter their residency. They might be able to remote work for a couple of months, or take some time off, or only come into the office three days a week, spending two days a week plus weekends in another state.

Other people might have ambiguous situations, spending time in two places, that they can choose to interpret differently, possibly making small changes that make a case they are residents elsewhere. Residency is very fuzzy, and many of the criteria that feed into it are easily alterable (for example getting a driver's license, registering your car, or moving your bank account to another state).

And yes, outright fraud is possible, too, given the fuzziness of the concept and the fact that no one is directly measuring where you spend your time.

The tax impact can be huge. If you are a resident of California, you pay California tax on all your income. If you are a non-resident, you only pay on the income earned in California. Plus, having only part of your income in California likely lowers your tax bracket.

Sure, sure. More pseudo economics from the Lafferites. He’s been proven wrong over and over again for 40 years.

As we like to say, the tax rate doesn’t even make the billionaires leave the state. High taxes mean high quality government. If you want to make money, you come to California. If you want to wallow in cow feces and buy a red hat, you leave the state.

We simply don’t have any of the problems the red states have. Because we don’t listen to charlatans like Laffer.

To reframe that "anonymous," other states can free ride on the California wealth creation engine.

Imagine a hypothetical no-tax, no-growth, destination.

Do they really get to say "see, we're better?"


I don’t know why some people hold up California as some sort of ideal. California, through no efforts of its own, ended up with the largest and most important IT industry cluster in the US. It also has the largest film industry, the largest port, and due to government procurement contracts, a large aerospace industry. California has the best weather in the nation, which has also helped it immensely in attracting residents and businesses. But it also has the highest poverty rate in the nation, and it’s k-12 schools are mediocre. It is not a progressive success story, and I continue to be baffled why people believe that. Canada is a progressive success story; California isn’t.

More pseudo-economics in NY.

5 Feb 2019: NY Gov. Andrew Cuomo announced Monday that state income tax revenues plummeted by $2.3 billion. Cuomo had planned to spend $176 billion — including about $100 billion in federal funds — in the new fiscal year that starts on April 1. The federal law approved by President Trump and the then-GOP controlled Congress limited SALT deductions to $10,000.

Go Figure Department: In the midst of an economic expansion, NYS tax revenues drop $3.7 billion. The loss of revenue from New York’s wealthiest puts New York in a bind because the state relies on a progressive income tax system that taxes the rich at a higher rate. One percent of the state’s top income earners provide 46 percent of the state’s personal income tax revenues, officials said.

Texas and Florida post population gains: TX 379,000 residents (from 2017-18) and FL 322,000. Net losers included NY: 48,510 and IL: 45,116. In addition to losing tax revenues.

"Texas placed fourth with $747 million – roughly one twenty-eighth of the money invested in California businesses"

4 States Control 80 Percent of Venture Capital Dollars

WeWork and Uber accounted for $8 billion in business investment from Saudi Arabia alone!

Where’s your Saudi cash Trumpers??

It is possible there is some froth in the California tech markets.

But it's kind of a plus when you can sell froth to foreigners.

I’ll take obviously fake email addresses for $200, Alex.

California 2050: Seven year old Barack asks, "Grandpa, what did people use before candles?" Grandpa answers, "Light Bulbs."

Nothing makes Trump supporters more angry than being confronted with facts. California is the fastest growing economy in the world. We have more billionaires per capita than any state. We have faster business formation, VC, investment, start ups, you name it. And we have high taxes !!

More Koch funded hit pieces. Somalia: the Kochian paradise !

So What?

From 2012 to 2017 -- the last data reported -- real per capita state income in California rose from 94.2% to 101.4% of the national average. Meanwhile Texas fell from 101.6% to 91.3%.

Wonder where they would be if Texas wasn't doing everything right and California was doing everything wrong. At least according to this blog.

Highest poverty rate in the nation too.

>High taxes mean high quality government.

Yes. Ask anyone in Chicago.

High taxes mean high quality government.

LOL. California is making medieval diseases great again and has out of control homeless camps, defecation and needles on the sidewalks, shitty roads, crappy public transportation, crappy schools, preemptive power outages and $2 million shacks. Sounds like paradise.

As a directly relevant example, there has been a massive outflow of people from Silicon Valley (high income tax) to Seattle (no income tax), which has caused Seattle to become one of the fastest growing cities in the country for several years. The tax differential figures prominently among the reasons for moving there, along with quality of life.

Almost all of the big Silicon Valley tech companies have massive and rapidly growing campuses in Seattle to retain these people -- the difference in taxes alone can cover your mortgage payment, even with the high cost of housing.

More power to Seattle, but fwiw, Washington state currently spends about 1/6 as much on R&D as California.

Does Tyler still want progress, or is he off that?

I’m including spending on social services, transient population, and ESL education as R&D, which I believe is fair. Human capital formation.

$1.1 billion in spending alone in LA county.

Washington has 1/6 the population, so per capita R&D is the same as California. Two of the "big five" tech companies were founded there, it punches well above its weight.

I own a house in both cities. The brain drain of top engineering talent northward has been evident for some time. In particular, there is already a (oft-mentioned) clear separation of the types of engineering done in each place. Silicon Valley does almost all of the apps, social, and consumer but much of the hardcore computer science, cloud, and infrastructure engineering work, which used to be done in Silicon Valley, has moved to Seattle even for Silicon Valley companies. For example, not only are the two dominant cloud companies Seattle based, all of the Silicon Valley companies trying to compete in that market have their cloud engineering offices in Seattle because that is where all the talent is.

No one is competing with Silicon Valley as the center of the world for apps and advertising but that is a very different version of Silicon Valley than the engineering-centric one that made it wealthy and famous. That part of the industry moved to Seattle and elsewhere.

Yawn, another red state attack on Californian success. VC funds, infrastructure, start ups, capital formation, education, services, the list goes on. Washington does not come close. It has two legacy companies, Amazon and Microsoft. Uber is not in Seattle. Facebook is not in Seattle. Yelp is not in Seattle.

California has an income tax. That tax pays for the most robust and successful education program k-12 and university in the county. We start businesses because we have the talent.

We invest in our future. Washington does not.

Yawn, another troll.

But inevitable on a platform that cannot guarantee unique names.

(Good point on per capita.)

You're posting as anonymous and you complain of people taking your name? Does that make sense in your mind?

I post as anonymous *because* supposedly unique names were impersonated just as easily.

I don't read every MR topic. If some anonymous is there, and I'm not, no skin off my nose.

But jumping on my comments to make them mean something else?

I hope we agree that's bullshit.

A "red state attack"? There aren't many states bluer than Washington. Your dismissal is hollow. Both Amazon and Microsoft are growing revenue 20% year over year as "legacy" companies. Facebook's largest engineering campus outside of Silicon Valley is in Seattle and they keep expanding. Uber? Same. You can go down the list (Google, et al).

The key takeaway here is that you have no idea what you are talking about. California is profligate with taxpayer money, there is very little to show for all that spending.

You better let the VC firms and start ups know. Because they ain’t moving to Washington.

How’s Boeing doing?

Obviously this study is for 2012-2013 but the SALT deduction caps of 2018 did some good amounts of damage. Can't wait to see the paper on that when it gets written and no I won't pay your $5 to find out. Academic economists nickel and dime so much while papers on physics, computer science, math are free on arXiv.

The $5 charge that's only NBER. Most economists make their papers available for free on their websites or on SSRN, or research center working paper series (websites). NBER is... different.

Emphasis on good. Now if the Democrats who run most of these high tax states could discover fiscal restraint.

Title should clarify “high income taxes.” Income taxes are high because Prop 13 is so distortionary. A lot of people out there who are paying $3,000 a year or less in taxes on 7 figure homes.

Even worse, there are businesses with lots of property sitting on cheap property taxes. Unlike human residents cursed with mortality, corporations are pretty much forever and get to lock in those rates just as long.

"Corporations are people too, my friend," and despite being immortal the share of property tax revenue collected from them has remained constant at about 60%.

Unlike human residents cursed with mortality....

But human residents can pass tax-advantaged properties on to their kids without resetting the taxable value. 'Progressive' California has invented a new form of landed gentry.

In the UK tenants could pass subsidised "council housing" on to their kids, irrespective of income. As you say, "a new form of landed gentry".

Income, sales, gas, and every other tax and fee are high because liberals like to tax and spend.

I must pay the state for the privilege to work

Franklin told a questioner, we were given a republic. We could not keep it.

Taxation is slavery to the government.

They had to amend the Constitution to permit income taxation, which form of state theft the Founders knew were antithetical to individual liberty.

The US Constitution denied Congress authority to lay direct taxes on American citizens. A. Lincoln got away with suspending habeus corpus and imposing an income tax to help pay for the Civil War. On the final destruction of the Confederacy, the CW income tax ended. In 1894, to replace tariff revenues, the powers that be imposed another income tax which was ruled unconstitutional. They quickly pushed through the 16th Amendment which empowered Congress to make tax slaves out of American citizens.

Taxation Is Theft.

The real problem is a flaw in our democracy that allows politicians to exempt large demographics from taxes while allowing the demographic to vote. Everyone should be taxed and taxes should be more evenly distributed.

Cal has high taxes? don't say..this is hardly new news

Trivia: George Mason University is in Virginia.

Virginia ranks 14th among US states for R&D funding.

Coincidentally that is 1/14th of the California spending.

Maybe George Mason shouldn't try to teach us how to suck eggs.

Suck eggs is the term we use for Santorum. Which we cleverly named after a one time Republican candidate for president.

California has high taxes and succeeds brilliantly. Lowest poverty in the nation and highest immigrant population. High taxes and high wages. Highest percentage of college graduates, Virginia isn’t even close. Texas is in the bottom 3 for wages, growth, and college degrees.

Time to make a choice. The Texan path of destitution and pollution, or the Californian path of balanced budgets, low unemployment, high quality education and infrastructure, and technology.

Trivia: California’s long term liabilities, including pensions, are net negative. Texas is projected to be bankrupt by 2030.


Dick the Butcher still following me around, I see.

I guess instead of getting mad we can just diagnose this.

I think it was a legitimate question, why George Mason and low spending Virginia, should give criticism to California.

Maybe it was such a good question that it had to be attacked by a troll!

Guys spot the troll.

He throws out figures with no citations or links. He attacks George Mason and the Kochs. He never gives per capita figures. And he complains about trolling.

What would we ever do without the random, unrelated Twitter links?

Water is surprisingly wet.

SF billionaires (and they lead the nation in billionaires per capita) would rather packed themselves like sardines, wade through human fecal matter, pay confiscatory levels of taxation, and put up with mental health levels of political correctness than move to a low tax, red state. These are guys that could live anywhere. Let that sink in.

The billionaires need to stay right where they are; it's their progressive liberal policies that have created the mess in which they live. Let them deal with the consequences of their actions instead of moving to functional states to recreate the trouble they just fled for themselves and their new neighbors.

Um. They are billionaires. You can't make them do anything. The fact is they choose to stay even with all the headaches. That is saying something.

They stay because they have the one thing that all leftists need, which is an subservient underclass to lord over.

It's not the billionaires, or the leftist politicians for that matter, walking through fecal matter on the sidewalk or riding public transportation; they have their own drivers. They aren't worried about crime or illegal immigration; they live in gated communities or have walls around their mansions. Affordable housing, or affordable anything, is obviously not an issue. And the billionaires only pay about 4% more in income tax rate than the median earner so they are less affected by high rates overall than the average Californian.

Of course history tells us that a society with high amounts of income inequality and a disappearing middle class is prone to social upheaval, which is especially troubling for places like California which is both highly urbanized and also chock full of leftist sentiment towards the rich. We know how these leftist revolutions tend to go, after all. That's why it's important to keep the billionaires (and, again, the politicians for that matter) around to see the chickens come home to roost.

As to the how, my solution is a wall. A big, beautiful wall.

"They stay because they have the one thing that all leftists need, which is an subservient underclass to lord over."

Um. Plenty of cuckservatives in red states that vote against their own interests ready to fellate their big business and billionaire masters. If there was a "subservient underclass" this is it. Yet the billionaires still aren't moving. They'd rather step in poo than live in flyover states.

Maybe they left because of the fire hazard. Today, power was cut to over 500,000 in northern California because of the fire hazard, and the prediction is that another 500,000 will have their power cut. For readers who may wonder why power was cut, when fires burn transmission lines in one place, it causes a surge in the transmission lines in another, the surge causing sparks that ignite fires. That's why the California power company is being sued by homeowners whose homes were destroyed by fire. So why didn't the power company cut off the power before? Damned if you do, damned if you don't: if you cut power, fighting existing fires is compromised. Good reason to get the Hell out of California.

PG&E should be liquidated and divided into smaller municipal Gas and Electric Companies like San Diego, Santa Clara, and Palo Alto. Bigger isn't always better, sometimes it means slow and dumb.

Again, I don't think we should be encouraging r-strategists to leave. They need to learn the consequences of their actions.

Too late, Trump's SALT deduction disaster means Californians exiting in droves are turning a lot of states blue. They will teach red staters how to form billion dollar tech companies. CA progressivism means high taxes, high costs of living, but high salaries.

Tyler would like free riders to leave California, whereas Trump actually wants to kill the golden goose.

Spot the troll. Even I wouldn’t connect Trump to California.

Power may be out for up to a week.

Combination of environmentalists opposition to tree trimming and brush clearing and population expansion into high risk areas. Plus changes to liability laws. PG&E seems to have only a selection of bad options at this point.

One wonders if this will be enough to induce some rationality, but I doubt it.

They just need to decentralize their power generation instead of running lines into the brush. The area is much too wide for any one company to manage economically in an area prone to cycles of growth and drought. They may want to consider breaking PG&E into a few public utilities.

But regardless, whatever we do, let's not have any wilderness areas.

Californian here. I've seen the maps. The shutdowns look pretty mountainous and unpopulated.

It's an interesting experiment. Certainly after the Paradise Fire we don't want to do everything the same.

(It is entirely possible that some will now die from generator accidents. Carbon monoxide. Balancing risks is not easy.)

In other words, no big deal as long as it's the people in unpopulated areas (?!) going without electricity and dying, and not you.

I'm reminded of last week's post on the generator mafia in Lebanon, it sounds like Cali could use some of that.

Why did you misread me?

People died in the Paradise Fire, people might die from generator accidents.

Is a very real question how to balance those risks.

Another solution would be to develop a power generation and transmission system that reliably serves all its customers without killing anyone, something that the other 49 US states, other first-world countries, and many developing ones have managed to do.

Climate change, pine beatles, and dead standing forests make a fairly unique problem.

What, is this something that the world's greatest collection of human capital can't handle? All that spending on education and R&D, gone to waste...

Maybe this is semi-optimal allocation of (available) infrastructure capital.

Few systems are actually maximum ROI at 100% uptime.

On a population basis, the shutdown covers 1/40th of the state.

California and Massachusetts get all the hype, but New York and Illinois are actually much worse.

You guys are the economists but wouldn’t Laffer predict that migration etc. would have taken >100% of the windfall in already high taxes California?

As it is there was avoidance but revenues still rose.

No. Laffer conjectured a curve. He didn't say all tax increases reduce revenue. California has not quite reached the top of the curve but definitely hitting declining returns. They're facing a lot of dead weight losses. Unless getting rid of the more tight-fisted millionaires is the point.

It's Tiebout [voting-by-the-feet] rather than Laffer.

True enough, but wouldn’t the government role be to increase taxes until revenues are maximized? In that regard, California would still seem to fall short - assuming the Laffer Curve that would project off this study’s analysis.

The government should raise taxes till the windfall of a new tax is 0 if it wants to maximize revenues. Other goals would call for a reduced rate, of course - but that would seem to be beyond what Laffer argued.

I've been hoping someone would write an alternate national anthem suitable for a 1970s big band like Chicago. Working title, "California Sucks".

One of the few federal government's area of comparative advantage over the states is the ability to tax.

One way to use this:

The Federal Government could send all the money they would have spent on healthcare to the states on an age adjusted per capita basis and require that the state Government's cover the elderly and poor.

I've already bought my escape property.

Sorry man, American taxes "all-in" are more progressive than just about any European country.

American incomes are more skewed too, but that's a different story.

California is solving for the equilibrium. They want open borders but no new home construction. So somebody has to leave.

Maybe the California billionaires moved to West Virginia:

For all the folks touting California’s success by comparing it to Kansas, I have one question: what are the lessons that other blue states can learn from California’s success?

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