Behavioral Responses to State Income Taxation of High Earners: Evidence from California
79 Pages Posted: 3 Oct 2019 Last revised: 24 May 2021
Date Written: July 15, 2020
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. First, over and above baseline rates of taxpayer departure from California, an additional 0.8% of the California residential tax filing base whose 2012 income would have been in the new 12.3% top tax bracket were no longer full year residents of California in 2013. Second, to identify the impact of the California tax policy shift on the pre-tax earnings of high-income California residents, we use as a control group high-earning out-of-state taxpayers who persistently file as California non-residents. Using a differences-in-differences strategy paired with propensity score matching, we estimate a substantial intensive margin response which begins in 2012 amongst California top-bracket taxpayers. Our estimates imply an intensive margin elasticity of income with respect to the marginal net-of-tax rate of 2.5 to 3.2. Among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 45.2% of the windfall tax revenues from the reform within the first year and 60.9% within two years, with the extensive margin accounting for 9.5% of this total response.
Keywords: income taxation, migration, high earners, state taxation, marginal tax rates, taxable income elasticity
JEL Classification: H24, H31, H71, H73, J22, J61, R23
Suggested Citation: Suggested Citation