California Tax Hike Sparks Millionaire Migration
In a desperate attempt to get California’s budgetary nightmares under control, Democratic Governor Jerry Brown pushed for a tax hike plan last November to increase the state’s overall tax rate on millionaires to the highest in the nation at 13.3%. But now, experts say Brown’s actions may be sparking a tax migration for the high income earners whom the state relies on to pay its bills.
“You’d be a fool not to leave California,” says Ed Botowsky of Chapwood Investments who manages the finances of several professional athletes and high income Californians. Botowsky says some of his clients have already made the decision to flee the state to avoid the tax crunch.
Seven states including Florida, Texas, and Nevada do not have a state income tax. That can mean big savings for millionaires willing to make the move. Tiger Woods’s move from California to Florida will save him an estimated $7.5 million in taxes this year alone. His golf rival, Phil Mickelson, who recently expressed concern over California’s tax squeeze, could save $8 million this year by following Tiger's lead.
An estimated 62.7% of California’s general revenue fund comes from personal income taxes. With roughly 41% of the state’s entire revenue coming from the top 1% of California income earners, the state is especially vulnerable to even modest fluctuations in the migration of its millionaires.
"The higher reliance on personal income tax is a double-edged sword," said Fitch Ratings Senior Director Douglas Offerman.
Michael Genest, who formerly ran California’s state finance department, says he worries what will happen if the millionaire migration dries up the revenues Gov. Jerry Brown is banking on.
"What happens if revenues fall through the floor? He's going to be right back where we were in 2008," Genest said.
The recent 5% federal tax increase on high earners, coupled with California’s 13.3% state income tax, may prove more than millionaires are willing to take, especially since they have options and can move easily.
“They’re going to have an exodus of people,” said John Karaffa, president of ProSport CPA, a Virginia-based firm that represents nearly 300 professional athletes, primarily in basketball and football. “I think they’ll see some [leave California] for sure. They were already a very high tax state and it’s getting to a point where folks have to make a business decision as well as a lifestyle decision.”