California Is Taxing Itself to Death

Since departees tend to be high earners, their absence threatens to wreck the state's swollen budget.

For decades, California has been a desirable destination for Americans lured by the promise of riches, stardom, or at least a good place to surf.

That dream is over for an estimated 343,000 Californians who fled the state between July 2021 and July 2022, according to data from the Census Bureau. That marks the third consecutive year that California has seen a net decline in population.

Those heading out of state tend to be wealthier residents, and their exit threatens to blow a hole in the state's finances. California lost about $343 million in tax revenue during 2021 due to out-migration, according to a study from the online real estate firm MyEListing.com. The company says "California's high personal income tax rates seem discouraging for many high-wealth individuals."

While that study does not cover the same period as the most recent IRS data, both point to a worrying trend. So does a new projection from California's Finance Department, which expects the state's population to stagnate at 39 million for the next few decades. Less than a decade ago, the same agency expected the state's population to grow to 53 million by 2050.

One Californian who isn't leaving (yet) is the Los Angeles Lakers' star power forward, Anthony Davis, who re-signed with the team in July. Even so, Davis' three-year, $186 million contract extension is a useful illustration of why so many others might be looking to live elsewhere.

Sports economics blogger Andrew Petcash calculates that Davis will end up paying $27 million in income taxes each year, a sum that is actually larger than the $24 million he will take home annually after all other taxes are paid. More than $4 million of that annual tax bill will go into California's coffers, thanks to the state's 13.3 percent marginal tax rate on high incomes. If Davis signed with a team in Florida or Texas, states with no income tax, he would save more than $12 million over the course of his contract.

That is certainly a consideration for other athletes. After he left the Boston Celtics this summer to sign with the Dallas Mavericks, Grant Williams told The Athletic that his former state's new 9 percent income tax on those earning more than $1 million annually was part of the reason. "With the millionaire's tax," he said, his $54 million contract in Dallas "is really like $58 million in Boston."

For those of us not earning pro athlete salaries, the savings achieved by abandoning high-tax states might be less dramatic. Still, inflation and the rising cost of living make every dollar count. Combine that with the fact that more jobs can be done from anywhere, and Americans on average are wealthier than ever. As a result, more people have the means and incentive to actively choose where to live, work, and pay taxes.
States must adjust to this new reality. Otherwise, they will discover, as California is, that punishing prosperity comes at a cost.