PALO ALTO, Calif. » It is getting awfully expensive to be a millionaire in California.
With the new year, big earners are confronting a 51.9 percent federal-state income tax hit on earnings over $1 million, the result of a confluence of new tax-the-rich levies imposed by California and Congress in the closing days of 2012. That is officially the highest in the nation. And at 13.3 percent, the top-tier California income tax is, in addition to being higher than any other state, the steepest it has been since World War II.
Though no one expects traffic jams at 30,000 feet as panicked millionaires make for the state line, millionaires are once again grumbling about abandoning California for less punishing tax climates. Phil Mickelson, the championship golfer who collects purses in excess of $1 million, suggested that he might become the latest in a line of athletes and entertainment figures, among them Tiger Woods, who left California for states like Florida, which has no personal income tax.
The Republican governor of Texas, Rick Perry, firing a new shot in an old interstate war, began putting radio advertisements on the air in California this week summoning burdened businesses his way. "I have a message for California business: Come check out Texas," Perry said.
Blood, it seems, is in the water.
"Are you looking to leave California because of the recent tax increase?" a CNN Money correspondent posted online in a source-hunting inquiry this week. "You could be profiled in an upcoming story."
For all its many attributes, California has long been a state defined by high taxes and the people who hate them; conservatives here were successfully organizing against taxes way before anyone heard of the Tea Party. Yet this milestone — or perhaps millstone — has sneaked up as an unpleasant surprise, a cloud in the sky at a time when the state budget has come back into balance (in no small part because of the aforementioned tax increase) and the state economy seems to be snapping back to life.
Mickelson later apologized for discussing the topic, though that did not prevent Perry from sending him a message on Twitter: "Hey Phil … Texas is home to liberty and low taxes … we would love to have you as well!!" Conservatives and anti-tax activists have cited Mickelson’s remarks as the latest evidence of what they have long argued are the costs California pays for having such a high tax burden.
"It’s definitely the highest in the United States," said David Kline, a vice president of the California Taxpayers Association, a taxpayers’ advocacy organization. "What we like to point out to people is that there are states with absolutely no personal income tax — so if you moved from California to Florida, and you are in a high income bracket, you are automatically giving yourself a 13.3 percent raise."
For what it is worth, California’s big earners can deduct their state taxes from their federal returns, at least for the time being: were Congress to repeal that deduction, which is now under discussion, the actual tax burden would be 52.9 percent. The top rate in California has been as high as 15 percent and as low as 6 percent, and the combined rate has been higher at times, such as when federal income taxes spiked to pay for wars.
Gov. Jerry Brown, a Democrat who urged voters to approve the latest state income tax surcharge, dismissed Perry’s poaching as political trickery, suggesting that high earners consider other factors in deciding where to locate.
"People invest their money where these big things have occurred," he told reporters. "The ideas, the structures, the climate, the opportunity is right here on the Pacific Rim."
Some of those earners seem at least resigned to the tax burden as a cost of being able to live in California rather than, say, Texas.
"I am happy to pay my taxes, whatever they are: no problem with me," said entertainment mogul David Geffen, who owns estates on the oceanfront in Malibu and on the hedge-lined streets of Beverly Hills. Geffen said he thought it could hurt the business climate, but added, "I don’t think anybody of means is really going to move because of it."
Cristobal Young, an assistant professor of sociology with the Center on Poverty and Inequality at Stanford, conducted a study last fall that concluded that tax rates had little effect on where millionaires choose to live.
Young said he suspected that few, if any, millionaires would leave or stay away because of this latest tax increase. More likely, he said, they would find ways of reducing their tax burden, with loopholes or income avoidance, or simply reduce their work.
"I suspect the accountants are busier this year, but I don’t think the moving companies are getting a boost," Young said. "Moving out of state is actually one of the most costly responses they could make. California’s high-income earners are clustered in coastal cities far from state borders. Moving to Nevada or Texas or Florida is a very big life change, and means leaving behind family, friends, colleagues and business connections."
The burden represents a political reality both here and in Washington: while there might be a new willingness to raise taxes to deal with governmental shortfalls, the target of those new taxes is the wealthy.
In December, Congress agreed to increase federal income taxes on income over $400,000 a year. In November, California voters approved the temporary state income tax surcharge, establishing the top marginal tax rate at 12.3 percent. There is also is a 1 percent millionaire surcharge for mental health programs.
The median rate paid by average taxpayers is significantly lower. Still, this new round of upper-income taxes lifted California to the top of the tax mountain, said Gerald Prante, an economist at Lynchburg College in Virginia who published a report studying the marginal tax rates across the country. Right behind California is New York City, which has a 51.7 percent marginal rate.
Hawaii ranks third, and seven states do not have a personal income tax at all.
Prante also said there was little evidence that the high taxes he charted had chased anyone out of California. "Has one person ever moved?" he said. "Obviously, yes. But how big an effect is it? Taxes aren’t the only thing that matters when people move."
But Bradley R. Schiller, a professor of economics at the University of Nevada, Reno, said the argument that high taxes were not pushing people defied the obvious. French actor Gerard Depardieu left his home country to avoid what he described as a severe increase in income taxes, drawing a storm of criticism from France and fellow citizens. Accordingly, Schiller said, high-profile millionaires are unlikely to want to draw attention to decisions to decamp for lower-tax states, thus making the migration harder to track.
"Taxes have to be a very important of the equation," Schiller said. "If you are talking about an income tax of 13 percent on a millionaire in California and an income tax rate of zero percent on a millionaire in Nevada, to argue that it doesn’t affect a millionaire’s locations decision is to say all millionaires must be stupid."
Schiller, who was born in California, now makes his home in Nevada.