Research shows that when California hiked taxes on the rich they left and revenues were only half those forecast

The new issue of the American Economic Journal: Economic Policy is out and it contains a study by economists Joshua Rauh and Ryan Shyu titled “Behavioral Responses to State Income Taxation of High Earners: Evidence from California.”

Back in 2019, I wrote about an earlier version of this study that examined “the effects of personal income taxation on household location choice and pre-tax income”:

In 2012, Californians facing “temporary” multi-billion dollar budget deficits passed Proposition 30. This included a 3.45% sales tax increase as well as a $42 billion “temporary” increase in the state’s progressive income tax rates. Rauh and Shyu find that wealthy Californians were about 40% more likely to leave after the income tax hike, mostly to states without income taxes. They also found that these departures and other responses to increased taxes eliminated 45.2% of the revenue the state expected to get from high earners.

Within two years, 60.9% of this windfall had been eroded. It turns out that there are limits to taxing the rich, even in a state like California with all the advantages of climate and the like which it has.

There is a large and growing body of evidence showing that taxes play a role in determining where people choose to live. In a 2020 paper for the Journal of Economic Perspectives, economists Henrik Kleven, Camille Landais, Mathilde Muñoz, and Stefanie Stantcheva “review[ed] a growing empirical literature on the effects of personal taxation on the geographic mobility of people and discuss[ed] its policy implications.” They found that:

There is growing evidence that taxes can affect the geographic location of
people both within and across countries. This migration channel creates another
efficiency cost of taxation with which policymakers need to contend when setting
tax policy.


This body of work has shown that certain segments of the labor market, especially high-income workers and professions with little location-specific human capital, may be quite responsive to taxes in their location decisions. 

Rauh and Shyu’s new paper adds to that body of evidence.

Among empirical economists there is little doubt that taxes are one factor which determine the location of individuals and businesses. Only in the bizarro world of Minnesota’s public policy debate do people persist in denying what the empirical evidence shows. Babbittry dies hard.