The Risks to California’s Tax Base Due to Net Migration

By Gerd-Ulf Krueger

The migration of people in and out of California has a significant impact on the state’s tax base that is important for policymakers and all Californians to understand. This article uses data based on migration and taxes paid on income earned in 2014, the latest available.

The data suggests that net migration of taxpaying households (in-migration minus out-migration on a tax return basis) constitutes a leakage of California’s tax base, which involves most income brackets and all age groups above 35. This represents a revenue risk for the state.

Before we start, we need to say a few words about the strengths and limitations of IRS data. Data is based on address changes in the IRS individual master file. It is inclusive and reliable and covers 95% to 98% of the individual filing population. The main limitation is that it does not include those who are not required to file. Those primarily consist of the poor, including low-income elderly. This population is underrepresented. The very wealthy, whose tax data may not be immediately observed because they often file for extensions, may also be underrepresented. We don’t believe that these limitations undermine the general meaning of the data as far as the tax base leakage is concerned.

The data show the following:

· Looking at the number of returns, California lost a net of 10,700 tax paying households, which represents a tax base leakage of $2.1 billion to other states (See Figure 1).

· Most income brackets exhibited net losses of taxpaying households to other states (see Figure 1). An exception is the $50,000 to $75,000 income bracket, which gained a small number of households in 2014. The income bracket with the largest net loss was the lower income under $25,000 group at 6,005 households lost. The $100,000 plus income brackets recorded a net loss of 3,260 households.

· The biggest net income loss was recorded in the $200,000 plus bracket, the wealthiest bracket, which ultimately may have leaked $1.7 billion to other states (See Figure 2).

Looking at the number of returns by age brackets, we can see that the young are still coming to California. The under 35 age-group saw a net inflow of 6,100 households to California from other states during 2014, which is good news. Career starters are still very attracted to the Golden State (see Figure 3).

However, primary tax filer age brackets above 35 years saw negative net out-migration with the biggest group being 55 to 65, basically “baby boomer” tax filers in the prime of their taxpaying years. This can also be seen in Chart 4, which shows that California lost almost $1 billion in the tax base of the 55 to 65 age bracket. California also leaked out almost $1.1 billion in the 65+ retiree age group.

The IRS data shows that net out-migration represents a net leakage of its tax base and a revenue risk for California. The reason for this is manifold.

Probably, the leakage in the older and baby boomer age groups, and the lower income and some middle-income groups could be related to the high cost of housing. Some retirees and pre-retirees might also be cashing in their equity. This should give an added impetus for policies attempting to increase housing supply for the lower and middle class in order to keep them in the state.

The motivation for many high-income people leaving California is harder to surmise. It’s hardly the cost of housing that’s causing them to leave. The reasons could range from tax considerations or feeling some other kind of disenchantment.

We don’t really know until we ask people why they are leaving. Until that time, it is probably risky to reach too far with policy responses.

Gerd-Ulf Krueger, a member of Treasurer John Chiang’s Council of Economic Advisors, is principal economist and founder of KruegerEconomics, a housing and economic advisory firm for institutional investors, developers, builders, and state and local governments. The opinions in this article are presented in the spirit of spurring discussion and reflect those of the author and not necessarily the Treasurer, his office or the State of California. Job data used in this article is not meant to be used as an official State of California source or replace official information released by the State of California and/or State Department of Finance.