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  5. Behavioral Responses to State Income Taxation of High Earners: Evidence from California

Behavioral Responses to State Income Taxation of High Earners: Evidence from California

  • Joshua Rauh
  • Ryan Shyu
American Economic Journal: Economic Policy (Forthcoming)

Abstract

In November 2012, California voters passed increases to state marginal income tax rates of 1 to 3 percentage points for upperincome households. Drawing on the universe of California income tax filings, we present new findings about the effects of personal income taxation on household location choice and pre-tax income. On the extensive margin, an additional 0.8% of the California residential tax filing base whose 2012 income would have been in the new top tax bracket were no longer full year residents of California in 2013, relative to a baseline departure rate of 1.5%. To identify the intensive-margin impact of the California tax policy shift on the pre-tax earnings of high-income California residents who remain, we make use of high-earning out-of-state taxpayers who persistently file as California non-residents as a control sample. Using a synthetic difference-in-differences strategy, we estimate an intensive margin elasticity of income with respect to the marginal tax rate of 2.6–3.0. Among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 55.6% of the windfall tax revenues from the reform over the first three years it was in effect, with even larger effects in the final year of this period.

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