Dan Walters: Will California's wealthy residents vote with their feet to avoid new income tax?

12/16/2012 12:00 AM

02/26/2013 8:19 PM

One of the debating points vis-à-vis Proposition 30, the tax hike that voters approved last month, was whether sharply increasing marginal income tax rates on a relative handful of high-income Californians would prove counterproductive by driving them out of the state.

Those rates are increasing by one to three percentage points, effective this year, and politicians count on them for about $5 billion per year in additional revenue.

Critics of the measure argued that the wealthy targets of the new taxes could easily avoid them by changing their residences to a state without income taxes, such as Nevada.

Supporters dismissed that criticism as fantasy, saying the high-tech entrepreneurs, movie stars and others who might be taxed enjoy living in California and would consider the extra levies as minor prices to pay.

No one knows, in fact, whether there would be a significant flight of wealthy tax refugees from the state, thereby undercutting the revenue assumptions.

We have anecdotal evidence that it could occur, such as the much-publicized decision of golfer Tiger Woods to relocate from California to income tax-free Florida or a court battle in Nevada over California inventor Gilbert Hyatt's move there to avoid taxes on royalties.

We also know, from a recent Census Bureau report, that there is already a significant exodus from California to Nevada, Florida, Texas and Washington – all states without income taxes – but don't know whether taxes play a significant role.

And then there's the rather intriguing research by two economists at Lynchburg College in Virginia into state-by-state comparisons of marginal income tax rates, showing California as having the highest rate due to the sharp increases in Proposition 30.

If there's no "fiscal cliff" deal to the contrary and higher federal income tax rates return in 2013, the economists reported, California's top combined federal-state marginal rate would be almost 52 percent, even after adjustment for the federal deductibility of state taxes.

That raises the possibility that while California's tax hike alone might not spark a flight of the wealthy from California, it could be the proverbial straw that broke the camel's back if higher federal rates also kick in.

How difficult would it be, after all, for the high-tech executive living in Hillsborough to declare his ski resort condo in Nevada to be his primary residence, take out a Nevada driver's license, register to vote in that state and treat his California mansion as his vacation home?

A betrayal of the state that fueled his wealth? Perhaps, but consider this: California-based Google is using a front in Bermuda to avoid taxes on billions of dollars in European income.

Wouldn't Google's millionaires also avoid state taxes on themselves if they could?

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