Professional golfer Phil Mickelson, one of California’s many but dwindling wealthy, apparently carded a bogey when he intimated over the weekend that the near 60 percent marginal tax rate on the state’s millionaires may be enough to make him flee to a lower tax burden state.
In November, the state passed Proposition 30, or the “$6 billion-a-year package of tax increases.” This is not the first time in recent history that California has increased its top tax rates to pay for its out-of-control spending.
Combined with other recent tax increases, the top rate in California is now 13.3 percent (includes the 1 percent mental health services tax on income earned over $1 million). Add that to the 43.4 percent Mickelson pays to Uncle Sam, and it is not hard to see why he wants relief from California’s punishingly high taxes.
Mickelson would not be the only taxpayer fleeing the California tax increases, and the exodus would affect the California economy and treasury. In fact, the exodus began long ago. From 2000 to 2010, California lost about 380,000 net tax returns to other states and $30 billion in tax return income (adjusted gross income or AGI).
There are numerous factors (e.g., state regulatory environment) causing California to lose more households than it gained over the past decade, but the tax burden is a primary factor, particularly when many states have significantly lower state and local tax burdens. California had the fourth-highest state and local tax burden among all U.S. states in 2010—in 2013 the state will have the highest marginal effective tax rate on wage income (51.9 percent).
Texas, for example, had the sixth-lowest state and local tax burden in 2010, and will have a substantially lower marginal effective tax rate on wage income (42.8 percent) in 2013. In total, from 2000 to 2010, the state of California lost nearly 80,000 tax returns and about $4.5 billion in tax return income to the state of Texas.
And, on the links, one of Mickelson’s primary competitors and a California native, Tiger Woods, long ago moved from California to Florida. Similar to Texas, Florida will have a marginal effective tax rate of 42.8 percent, significantly lower than California in 2013.
The federal government should draw lessons from California’s errors. While it is unlikely that high-income Americans will flee to other countries, they will adjust their behavior as their incentive to work and invest continues to decline as tax rates rise.
Heritage policy research shows that that increasing marginal tax rates at the federal level reduces economic growth, and slower economic growth translates into significantly less tax revenue. That is why raising tax rates fails to achieve the revenue estimated by the Congressional Budget Office (CBO), the Joint Committee on Taxation (JCT), and other institutions using static scoring models.
Federal policymakers need to remember that increasing marginal tax rates will slow the U.S. economy, and they are not going to resolve the nation’s fiscal imbalance with more rounds of tax increases. It is time to shift the focus of debate to spending levels, particularly spending levels in entitlement programs.