Why State Taxes Matter

In 2020, California’s population fell for the first time in over a hundred years.

While any population loss is problematic, the exodus of high-income taxpayers is especially worrisome for the California budget because of how it collects tax revenue. Those earning over $5 million a year represent only 0.1 percent of the population, but in 2020 they paid 25 percent of California’s income taxes. 

An analysis of individual tax data reveals that outmigration by high-income taxpayers spiked in response to two major tax events.

The first was in 2012, when California increased taxes for top earners under Proposition 30. 

The second was in 2017 when the Tax Cuts and Jobs Act limited the amount of state taxes that filers could deduct from their federal taxable income.

The exodus of high earners to states with zero income tax rates means California loses more than just income tax revenue; it also misses out on the future income and spending that come with it.

When states disproportionally rely on high-income taxpayers and capital gains income for most of their tax revenue and then raise their rates too high, those taxpayers respond. 

And the exodus that follows ultimately means that everyone else must then pay higher taxes, or the state must cut social programs to address the revenue shortfall.