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Why the Middle Class Flees States That Tax the Rich

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Why the Middle Class Flees States That Tax the Rich

Such places favor bigger, more pervasive government. December 18, 2022
Economy, finance, and budgets

One of the more common forms of online clickbait these days are reports ranking the best places to live—best for families, for retirees, for pet owners, and so forth. Whenever I see these “studies,” some based on dubious parameters, the first thing I ask is, “Do they correspond with reality?” In other words, have lots of people already migrated to these places—and if the answer is no, why not?

I had this in mind when I saw a recent study on the most tax-friendly states for the middle class. “If a move from one state to another is in your future,” the study proclaimed, “you could save big bucks by relocating to one of these states.” But sitting there on the Top Ten list was California, which rarely makes anyone’s rankings of tax-friendly states. Even the report’s authors seemed surprised. “Wait, what? California is a tax-friendly state?” they asked. “Yes . . . for middle-class families.” What accounts for this ranking, they explained, is that the state’s progressive income tax hits upper-income households with whopping rates but levies modest ones on everyone else. One recent study, for instance, found that income taxes take, on average, nearly 10 percent of family earnings from high earners in the Golden State, but just 1.2 percent from middle-income residents. Even high taxes elsewhere, such as on gasoline, don’t offset these advantages.

My first reaction to this cheery news about California was to wonder why, if it’s such a tax haven for the middle class (and even more so for low-income households), so many people are rushing to leave. California’s net domestic outmigration ranks highest among the states, which means that more residents are departing than arriving there—and they are exiting by the hundreds of thousands every year. You can’t have that kind of exodus just from upper-income earners—certainly not from the top 1 percent, the target of the highest tax rates. In fact, the biggest leavers by far are lower- and middle-income people. And middle-class losses have grown in the last five years to about 200,000 adult residents. Meantime, some 300,000 adult Californians from lower-income categories have also left in that time, many bringing their children with them. 

Advocates of high taxes say that people don’t relocate because of taxes. It’s true that in surveys that ask people why they moved, migrants list plenty of reasons, including housing costs, economic opportunity, and pursuit of a better overall quality of life. Still, there’s a close correlation between lists of the highest-taxing states and rankings of states that people are leaving. The relationship is so glaring that several years ago Gallup remarked, “Even after controlling for various demographic characteristics including age, gender, race and ethnicity, and education, there is still a strong relationship between total state tax burden and desire to leave one’s current state of residence.”

What’s going on illustrates the extent to which taxes are an essential component in state migration, but not always in a straightforward way. Taxes don’t exist in a vacuum; they are one component of a governing philosophy. High taxes represent an approach that favors bigger, more pervasive government, which takes many other forms besides taxes: a tendency to greater regulation and differing spending priorities than those of lower-taxed states, for example. The results in the extreme (and California politicians like to boast that they are in the extreme these days) have profound impacts on all the other factors that influence people to migrate.

One obvious example is housing costs. A recent survey found that 37 percent of Californians are thinking of leaving the state for this reason alone. California has the highest housing costs among the 48 continental states, and government has much to do with that. Though the state needs to be building about 180,000 units a year to maintain adequate supply, it is producing only about two-thirds that number, and the shortfall has persisted for years. Costs are astronomical, even for government-favored, heavily subsidized affordable housing. The cost of building a subsidized unit of housing in California can be as high as about $700,000 a unit, according to a recent study by the Government Accountability Office.

More recently, the Los Angeles Times found that construction costs for a handful of new subsidized housing projects are upward of $1 million per unit. Though supply-chain problems reflect some of the rising costs, the newspaper also blamed these eye-watering numbers on stringent environmental standards and government labor rules, as well as “high parking requirements, lengthy local approval processes and a byzantine bureaucracy to secure financing.” Given these dynamics, the amount of money a middle-class family might save on income taxes wouldn’t go far in paying for a mortgage on a Golden State home whose price has been inflated by government-induced scarcity.

Fueled by its taxes on high earners and on businesses, California has an enormous budget. Its general fund alone tops $200 billion. You might expect, for that money, top-notch services from government, but the opposite is true. One essential public-sector responsibility that heavily influences quality of life for everyone is basic infrastructure. California consistently ranks low on that crucial measure, and it’s not alone. Other high-tax states like New York also sit near the bottom of rankings for essentials like roads, bridges, and airports, while states with moderate and low taxes like Arizona and Nevada rank near the top. Money alone is clearly not the deciding factor in what kind of quality-of-life a government can help deliver, and residents notice.

Residents who migrate often list a search for economic opportunity as the reason they’re moving. Between 2015 and 2020, some 330,000 residents leaving California cited jobs as a reason they moved somewhere else. The state produces its share of new jobs, but these positions are increasingly concentrated in fewer industries and geographic areas. In the recovery after the steep 2008 recession, for instance, 40 percent of economic growth came in areas around San Francisco, where high-tech drives employment. But California, with its high taxes and regulatory burden on businesses, is increasingly losing out on investment in industrial jobs, the kind that provide good middle-income wages to blue-collar workers. In 2020, for instance, some 781 companies announced investments in new projects in Texas, according to Site Selection magazine, compared with 103 announcing projects in California. Over the past 30 years, outmigration from California has grown, even as the state’s capacity to create high-paying blue-collar jobs has declined. It’s not clear how many people searching for a job outside of California understand the role that high taxes play in the employment landscape, though any business executive trying to compete on a national or international stage can explain it.

Advocates for higher taxes often argue that progressive tax systems like California’s are fairer because wealthier residents pay at higher rates. Residents of states like California increasingly swallow that argument. The last several tax increases on the rich have all come via ballot amendments voted on in a general election. And yet high-taxing states like California, New York, and New Jersey also have among the highest rates of outmigration. These states are so “fair” that a significant number of their lower- and middle-income residents can’t wait to leave. Some tax haven that is.

Photo by Sundry Photography / iStock

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