Analysis: 'It's not California here'
Conservatives keep threatening, without much justification, that the rich will be driven from the state by Gov. Pritzker’s ‘fair tax’
Cows in a pasture in central Illinois. They wouldn’t seem to be going anywhere. (One Illinois/Ted Cox)
By Ted Cox
The country singer Elizabeth Cook has a song called “Not California,” which has the chorus: “It’s not California here.”
We’d like to recommend it to the folks at the Illinois Policy Institute and the Wall Street Journal Editorial Board.
Both those august bodies — neither of them known for tolerating taxes — recently drew on a study out of Stanford University suggesting that a 2012 tax hike in California undercut the tax base and prompted the very rich to move elsewhere.
The statistics are pretty damning, as statistics go. According to the study, after California raised its income tax on top earners making more than $250,000 and even more so on those making more than $1 million — much as Gov. Pritzker has proposed with his “fair tax” — the percentage of extremely rich people who moved out of the state rose 40 percent.
Others found ways to reduce or trade off income — the Wall Street Journal suggests they were “logging fewer billable hours — or deferring compensation” — so that 45 percent of the projected revenue increase for taxing top earners was “erased.”
But there are a couple of key issues that need to be addressed. The first is playing with percentages. Yes, there was a 40 percent “increase” in Californians earning more than $5 million a year who left the state, but what that actually means — as the Wall Street Journal admits, even as the IPI tries to hide it — is the percentage of the very rich who moved out of the state rose from 1.5 percent to 2.125 percent, or from just under one in 70 people earning $5 million a year to just under one in 50.
The IPI is a master of this sort of math, as when the Illinois tax rate went from 3.75 percent to 4.95 percent in 2017 — in part to fund the new state education funding formula — and the IPI called that a “32 percent tax hike.” The difference between the two tax rates is indeed 1.2 percentage points, and 1.2 is indeed 32 percent of 3.75, but the tax increase is 1.2 percentage points, not 32, which is easily confused by the reader or taxpayer (which is why the IPI does it).
Now, no one wants to diminish the importance of a state losing population, but there is not a whole lot of difference between one in 70 and one in 50, especially when you’re dealing with a sample size as small as the number of people making $5 million or more a year. Illinois’s persistent recent population loss, by contrast, has been driven by the flight of relatively low-wage workers who can’t afford the way the state’s regressive flat-rate income tax forces them to pay a far higher percentage of their wages in taxes than is the case with those making $250,000 a year and more.
As the Better Government Association showed in a study we never get tired of citing, when Illinois briefly raised its income tax from 3 to 5 percent earlier this decade — a whopping “67 percent increase,” allow us to beat you to the math, IPI — the rich didn’t flee the state. No, they stayed and prospered. Instead, it was the young and mobile and the poorly paid who fled the state. As the BGA stated: “Records show about 55 percent of departees were under 35 years of age, and more than 60 percent reported incomes of less than $50,000.”
And there are a lot more people under age 35 or making less than $50,000 than there are making $5 million. A lot more.
“There are a lot more people under age 35 or making less than $50,000 than there are making $5 million. A lot more.”
There’s new data too, however. The Los Angeles Times just posted a story Monday on conservatives leaving California. They blamed high, progressive taxes, sure, but also a move to be among like-minded people culturally and politically. What the Times found was that the most popular state for Californians to move to was Texas, and — you’re not going to believe this — the most popular state for Texans to move to was, yes, California.
Money was not the motivating factor. In fact: “Despite overall out-migration from the state, California has been gaining people with higher incomes. The (San Francisco) Bay Area has absorbed most of the influx of those residents.” According to the Times, California has actually added 100,000 residents making $120,000 or more a year over the last decade, 85 percent of those moving to the tech-booming Bay Area.
Plenty of people “consider” moving for a variety of reasons, but few actually follow through on it. As Ryan Enos, a professor of government at Harvard University, put it: “Actually moving is much more high-cost. That doesn’t mean some won’t eventually move, but the evidence that people move solely based on politics is low.”
It’s not any stronger for showing that people move to avoid higher taxes — unless those taxes are really high. And that’s the final key point the IPI avoids and the WSJ only grudgingly admits. The IPI does all it can to draw parallels between the 2012 tax hike imposed by California Gov. Jerry Brown on those making more than $250,000 and the graduated income tax proposed by our own Gov. Pritzker, which targets the same tax brackets. But there’s a key difference the WSJ acknowledges: California already had a progressive income tax when it raised taxes on those earning more than $250,000. In fact, the top California tax rate for those earning more than $1 million a year jumped from 10.3 percent to 13.3 percent (we’ll leave you to do the math on what percentage of a percentage that constitutes, IPI), while the tax rates on in-between brackets rose a percentage point or two.
That’s quite a bit different from what’s going on in Illinois, where everyone is currently paying 4.95 percent, and only those making more than $250,000 will pay more than that under Pritzker’s progressive income tax, peaking at 7.99 percent for those making more than $1 million. Where are the very rich going to move if they were to leave Illinois? Not Iowa or Minnesota, both of which have higher top tax rates, and not Wisconsin, where, as we stated just last week, the 7.65 percent top tax rate wouldn’t provide the savings to pay the moving costs.
In short, what we’re trying to say is it’s not California here, as if anyone needed to be reminded of that at this time of year. But Elizabeth Cook says it so much better than we ever could.