The Republican-backed federal tax bill flipped the tables on a never-ending question for California politicians: Will high taxes lead the state’s wealthiest residents to flee the Golden State for the comparable tax havens of Florida, Nevada and Texas? Republicans reliably raise that alarm when Democrats advocate for tax increases, like the 2012 and 2016 ballot initiatives that levied a new income tax on very high-earning residents.
But now, with the federal tax bill cutting off deductions that benefited well- off Californians, the state’s Democrats suddenly are singing the GOP song about a potential millionaire exodus.
“People with higher incomes pay a lot more money, and some of them may be tempted to leave,” Gov. Jerry Brown said when he unveiled his 2018-19 budget proposal last week. “This was an assault by the Republicans in Congress against California.”
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That fear animates Senate President pro tem Kevin de León’s bill that would allow California residents to write off their state taxes on their federal returns as a charitable deduction, as well as other proposals that Assembly leaders have hinted they’re preparing to offer. De Leon’s bill cleared a second committee this week and is on its way to a vote on the Senate floor. Trump administration officials say it won’t pass muster with the IRS.
Democratic state lawmakers are worried because California relies so heavily on the income taxes it collects from high earners to fund government services. The state’s wealthiest 1 percent, for instance, pay 48 percent of its income tax, and the departure of just a few families could lead to a noticeable hit to state general fund revenue.
Democratic state lawmakers are worried because California relies so heavily on the income taxes it collects from high earners to fund government services. The state’s wealthiest 1 percent, for instance, pay 48 percent of its income tax, and the departure of just a few families could lead to a noticeable hit to state general fund revenue.
“It is a genuine concern and that’s why the legislatures in high-tax states are swinging into action immediately,” said Katie Pratt, a professor at Loyola Law School in Los Angeles who specializes in taxes.
The new federal tax law poses problems for high earners in the Golden State because it caps two deductions that Californians used to limit their federal income tax liability, restricting their ability to write off mortgage interest and their state and local taxes.
Because real estate in coastal counties is so expensive with median home prices in the nine-county Bay Area topping $768,000, the cap on mortgage interest deductions probably will bite some middle class Californians, too.
In two reports last month, the Institute for Taxation and Economic Policy found that 11 percent of Californians would wind up with a tax increase because of the federal changes.
Among high income brackets, about 38 percent of Californians who earn more than $877,560 – the top 1 percent – would see a tax hike. About 25 percent of Californians earning between $130,820 and $304,630, also would see a tax increase, according to the tax policy institute.
Will the numbers add up to encourage a high-earning family to leave California?
“The new tax law is kind of like icing on the cake for some who were thinking about moving out of the state,” said Fiona Ma, a Democrat on the tax-collecting Board of Equalization who is running for state treasurer. “If they don’t have to stay here because of work or family, it doesn’t give them a lot of incentive.”
So far, research on the migration of wealthy Californians suggests that most very well off people are tied to their communities or businesses and do not often migrate for tax reasons.
A 2012 study by Stanford researchers, for example, found that millionaires are mostly rooted to their locations for economic reasons. The work, “Millionaire Migration,” was based on data from the Franchise Tax Board and looked at Californians who earned more than $1 million in a year and paid a special tax for mental health services.
Poster Comment:
This is from a Democrat newspaper.
Poor whites are leaving too but because of high rents, low wages and minority gang violence.