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A Big Texas Welcome to Californians

By W. Michael Cox and Richard Alm
November 07, 2012 6:59 PM EST
Illustration by Eric Timothy Carlson
Illustration by Eric Timothy Carlson

A slim majority of Californians did something strange on Election Day. They voted to make themselves worse off while boosting the economies of Texas, Arizona, Nevada and other states.

They did this by passing Proposition 30, the brainchild of Democratic Governor Jerry Brown. The ballot initiative raises the sales tax from 7.25 percent to 7.5 percent and imposes higher income-tax rates on many Californians. The top marginal tax rate goes from the current 10.3 percent to 13.3 percent, one of the highest in the nation. The higher income taxes will lapse in seven years -- but are retroactive to Jan. 1, 2012!

In Proposition 30, Brown entreated Californians to join him in a soak-the-rich scheme, sold as a panacea for the state’s financially stressed school systems. However, Proposition 30 will hit almost all Californians. Both rich and poor families will pay higher sales taxes. One recent study found that millionaires don’t move from California to avoid income taxes -- but Proposition 30’s threshold starts at $250,000, imposing new burdens on thousands of already heavily taxed families.

Many beleaguered taxpayers are going to decide they’ve had enough and head for other states that don’t impose as heavy a tax burden. The California weather and lifestyle just aren’t worth the higher price they now have to pay for it.

So, welcome to Texas: The weather isn’t as good, but you’ll have more money to spend.

Reverse Migration

For most of its history, California was the Promised Land, and newcomers arrived in droves. More recently, however, California’s migration patterns have begun to reverse. According to Internal Revenue Service data, net migration from California to other states totaled 865,444 people from 2004 to 2010, the highest in the nation.

Think of it this way: The equivalent of the entire city of San Francisco packed up and left California in six years -- and that’s with taxes lower than they will be under Proposition 30.

Where are the Californians going? For the most part, it’s to states with lower individual income taxes. Texas, a state with no income tax, leads as a destination, with a net inflow from California of 185,122 people from 2004 to 2010, the IRS data say. Next come Arizona (top income-tax rate of 4.5 percent), Nevada (no income tax), Oregon (11 percent) and Washington (no income tax). In the top 15 destination states for ex-Californians, the migration-weighted average of the highest marginal tax rate was just 3.9 percent.

The attraction of lower taxes is powerful. In our detailed study of migration among states, top personal income-tax rates were one of six crucial factors that explain two-thirds of interstate population shifts. The others are right-to-work laws (versus mandatory unions), the relative growth rate of government spending, housing prices, the quality of public schools and climate. With the exception of the weather, California doesn’t rate highly on any of them.

Arthur Laffer gave us his namesake “curve” that shows how raising taxes at some point discourages enough economic activity to actually reduce government revenue. The ease of migration within the country suggests the Laffer curve is sharply lower for states than for nations. It also follows that a state’s revenue-maximizing tax rate will decline over time because people are able to overcome the non-tax barriers to finding cheaper places to live.

California may get a short-term boost in revenue, but the state’s long-term problem is too much spending. Once Proposition 30 taxes expire, California’s finances will be in worse shape than ever. The government will be just as big or even bigger, but because of migration to other states, California will have fewer taxpayers to foot the bill.

Texas Model

What then? Does California extend the higher rates? Raise taxes even higher, chasing off even more citizens? Face up to its fiscal problems? By that time, of course, Brown will be gone from office -- so it will be someone else’s problem.

If California wants to reverse the out-migration, it should be lowering taxes, cutting spending and encouraging economic growth. That’s the Texas approach.

The passage of Proposition 30 will only make more Californians consider moving to Texas and other states. How many San Franciscos does California have to lose before politicians to come to their senses?

(W. Michael Cox is director of the William J. O’Neil Center for Global Markets and Freedom at Southern Methodist University’s Cox School of Business. Richard Alm is writer-in- residence at the center. The opinions expressed are their own.)

To contact the writers of this article: W. Michael Cox at wmcox@cox.smu.edu and Richard Alm at ralm@cox.smu.edu

To contact the editor responsible for this article: Katy Roberts at kroberts29@bloomberg.net.

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