Behavioral Responses to State Income Taxation of High Earners: Evidence from California

Abstract

In November 2012, California voters passed increases to state marginal income tax rates of 1 to 3 percentage points for upper-income households. Drawing on the universe of California income tax filings, we present new findings about the effects of personal income taxation on household location choice and pre-tax income. On the extensive margin, an additional 0.8% of the California residential tax filing base whose 2012 income would have been in the new top tax bracket were no longer full year residents of California in 2013, relative to a baseline departure rate of 1.5%. To identify the intensive-margin impact of the California tax policy shift on the pre-tax earnings of high-income California residents who remain, we make use of high-earning out-of-state taxpayers who persistently file as California non-residents as a control sample. Using a synthetic difference-in-differences strategy, we estimate an intensive margin elasticity of income with respect to the marginal tax rate of 2.6-3.0. Among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 55.6% of the windfall tax revenues from the reform over the first three years it was in effect, with even larger effects in the final year of this period.

Keywords: income taxation, migration, high earners, state taxation, marginal tax rates, taxable income elasticity

JEL Classification: H24, H31, H71, H73, J22, J61, R23