California income tax 2012 increase of up to 3 pct points for high-income households: Outward migration and behavioral responses by stayers together eroded 45.2% of the windfall tax revenues from the reform

Behavioral Responses to State Income Taxation of High Earners: Evidence from California. Joshua Rauh, Ryan J. Shyu. NBER Working Paper No. 26349, October 2019. https://www.nber.org/papers/w26349

Abstract: Drawing on the universe of California income tax filings and the variation imposed by a 2012 tax increase of up to 3 percentage points for high-income households, we present new findings about the effects of personal income taxation on household location choice and pre-tax income. First, over and above baseline rates of taxpayer departure from California, an additional 0.8% of the California residential tax filing base whose 2012 income would have been in the new top tax bracket moved out from full-year residency of California in 2013, mostly to states with zero income tax. Second, to identify the impact of the California tax policy shift on the pre-tax earnings of high-income California residents, we use as a control group high-earning out-of-state taxpayers who persistently file as California non-residents. Using a differences-in-differences strategy paired with propensity score matching, we estimate an intensive margin elasticity of 2013 income with respect to the marginal net-of-tax rate of 2.5 to 3.3. Among top-bracket California taxpayers, outward migration and behavioral responses by stayers together eroded 45.2% of the windfall tax revenues from the reform.