Tax Reform

The California Sand Trap

Pro golfer Phil Mickelson might become the next victim of California’s new high tax rates. In a press conference recently he explained that he felt targeted by the federal and state governments for being a successful high earner. He later walked back the comments for public relations reasons but his frustration with high taxes was clearly coming through.

It is difficult to blame him, as a high income earner in California he is taxed at the top rate of 39.8 percent at the federal level (up from 35 percent last year) and pays 13.3 percent at the state level—with  payroll taxes on top of those rates. Californians voted to approve Governor Brown’s “temporary” tax increase on the state’s top earners last November. California raised its top marginal personal income tax from 10.3 percent to the highest rate in the nation at 13.3 percent. This new achievement is sure to have its casualties in California, Phil Mickelson being a vocal first.

This is not new for California either; Tiger Woods said that the high tax rates drove him to leave California for Florida (which has no income tax). In fact, over the past 10 years, 1.5 million more Americans have left California for another state than have moved in. One result was that in the 2010 census, for the first time since California became a state, it did not gain any congressional seats. By contrast, in 2010, Texas gained 4 and Florida gained 2.

Despite denial after denial from the advocates for high state taxes, taxes matter. They matter to growth, to migration, and to a state’s economy. It is no accident that California has lost so many of its taxpayers in the past decade, many of them successful job creators. This has fueled what some have dubbed the “Sports Star Tax Migration” as many professional athletes from tennis players to golfers flee the high taxes of California (taking their incomes with them). We all remember the professional basketball player Jeremy Lin saving more than $1 million in taxes just by moving from New York to Texas last year.

The evidence shows that time and gain, taxpayers will move to keep more of their own money. This tax competition is evident as we see former Prime Minister of France, Nicholas Sarkozy, considering leaving France due to the new high taxes. The competition is even fiercer on a state level where moving across the border doesn’t require a change in citizenship. States are competing with each other and constantly trying to become more economically competitive.

ALEC’s Rich States, Poor States is an annual economic competitiveness guide that ranks states based on 15 policy variables that effect economic growth. Rich States, Poor States advocates for a low tax and regulatory burden as two of the best ways to achieve economic growth and become more competitive. By raising state income taxes to the highest in the nation and doing so in the most unpredictable way (the tax increases were retroactive to January 1, 2012) California will continue to lose citizens and businesses to other states.

While Phil Mickelson decides how much more of his income he could keep by moving out of California, the lesson for states is clear. Taxes matter and no state is in a vacuum. As states address fiscal policy decisions or simply want more sports stars, they should learn from the models of Texas and Florida rather than California.

In Depth: Tax Reform

Mainstream economists, small business owners and taxpayers across the country understand that growth-oriented reforms mean increased opportunity for all. As demonstrated by the annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, sound tax and fiscal policies are critical to economic health, allowing businesses and households to flourish. A…

+ Tax Reform In Depth