The IRS knows where you live. That’s not a threat, just a fact. The Internal Revenue Service collects data on how many Americans move to a new state, and where they go. This report makes for interesting reading, especially in California, and especially if it happens to be about the time that the governor announces his “May Revise” budget proposal, an update on his January proposal that reflects how much tax revenue actually came in.
California has an extremely progressive tax code, with a top marginal rate of 13.3% on taxable income above $1 million. But you don’t have to earn a million dollars to feel the bite of the state income tax. For a single filer, the tax rate on taxable income between $23,943 and $37,778 is 4%. Above $37,789 the rate jumps to 6%, above $52,456 the rate is 8%, above $66,296 the rate is 9.3% and it just goes up from there.
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A small percentage of tax filers pay most of the personal income tax revenue in California, with the consequence that if high-earning taxpayers leave the state, the effect on the budget can be significant. According to data from the Franchise Tax Board, in tax year 2020 there were 346,329 tax returns showing adjusted gross income of $500,000 or more. These were just 1.9% of all tax returns filed, but they accounted for 57.1% of the personal income tax revenue collected by the state.
According to federal tax returns filed in 2020 and 2021, over 700,000 individuals bolted from California between 2019 and 2020. The IRS says those taxpayers took more than $50 billion in adjusted gross income with them to their new state.
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The top destination for ex-Californians was Texas, with 105,434 individuals relocating there. It’s probably not a coincidence that Texas has no state income tax. More than 63,000 Californians are now living in Arizona, which has a flat tax of 2.5% on individual income. Nearly 55,000 moved to Nevada and 40,730 moved to Florida, two more states that have no state income tax. Washington, which does not tax individual income except for the capital gains of high earners, saw 46,677 Californians move in.
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California has been losing population to other states for years, but as the Legislative Analyst’s Office wrote in a report last August, “in the past, outmigration tended to be more pronounced among lower income Californians.” That has changed, the LAO acknowledged. “In recent years the state has seen an increase in net outflows across all income brackets,” the report stated. “Historically, upticks in outmigration have been associated with periods of rapid increases in the cost of living.”
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The LAO also noted an increase in movement within the state as residents fled urban areas for more rural ones. “Even though this was, to some degree, an intensification of an existing trend, it remains to be seen whether this pattern will endure or whether it was an oddity of the pandemic,” the analyst reported.
State policy makers should be deeply troubled by the fact that so many Californians who were willing to pay reasonable taxes for decent public services found that they have neither in California.
