New Study Highlights Economic Fallout from California’s 2012 Tax Hike

Share on Facebook
Share on Twitter
Share on
LinkedIn
+

BOSTON – A 2012 income and sales tax increase in California, named “Proposition 30,” stifled business activity, accelerated out-migration among the wealthy, and ultimately reduced the state’s tax base, according to a new study published by Pioneer Institute that aims to share empirical data about the impact of tax policy decisions.

“The academic literature on Proposition 30 is among the strongest evidence we have that behavioral responses to tax hikes occur disproportionately among the wealthy,” said Andrew Mikula, author of “How a 2012 income tax hike cost California billions of dollars in economic activity.

The new paper draws on a 2019 study from the National Bureau of Economic Research that examined behavior responses to Proposition 30, finding that such responses “eroded 60.9% of [new] tax revenues by [the law’s] second year.” This led the 2019 paper’s authors to speculate that California may be able to increase state tax revenues by reducing tax rates on certain high-income households, which may result in more incentive to generate income and less incentive to engage in tax avoidance activities. The authors also found that for those Californians earning over $5 million, the rate of departures spiked 42 percent, from 1.5 percent after the 2011 tax year to 2.125 percent after the 2012 tax year.

In other cases, higher income taxes directly affect pass-through businesses, which pay taxes through the individual returns of their owners, rather than through company returns. In California, sole proprietorships alone account for some $150 billion in economic activity every quarter, and this amount doesn’t include S corporations, partnerships, limited liability companies, and other forms of pass-through entities.

Many pass-through businesses have gone on to become large, successful corporations, such as Marriott, JCPenney, Walmart, Kinko’s, and eBay, the latter two of which were founded in California. But in a harsh tax and regulatory climate for businesses, in the words of Elon Musk, California “has a forest of redwoods and the little trees can’t grow.”

California’s state budget is heavily reliant on the wealthy. In 2019, 40 percent of individual income tax revenue came from filers with incomes over $1 million. Continuing to rely on revenue from such a narrow slice of the population for core services like education is unsustainable, likely increasing revenue volatility and necessitating harsh budget cuts during future recessions.

“A CEO who wants to leave California, where the nearest abutting state is a four-hour drive from a major economic center, has to hire all new people and put the company’s customer base at risk, and they are still leaving,” said Pioneer Institute Executive Director Jim Stergios. “For Massachusetts CEOs the calculus on moving is simpler. If we pass the graduated income tax, every other New England state will boast lower top income tax rates than Massachusetts. Even Connecticut, which has suffered job losses, an exodus of businesses, and tax revenue difficulties because of its own bad tax policies, will have a lower top rate than Massachusetts.”

About the Author

Andrew Mikula is Economic Research Analyst at Pioneer Institute. Mr. Mikula was previously a Lovett & Ruth Peters Economic Opportunity Fellow at Pioneer Institute and studied economics at Bates College.

About Pioneer

Pioneer’s mission is to develop and communicate dynamic ideas that advance prosperity and a vibrant civic life in Massachusetts and beyond.

Pioneer’s vision of success is a state and nation where our people can prosper and our society thrive because we enjoy world-class options in education, healthcare, transportation, and economic opportunity, and where our government is limited, accountable and transparent.

Pioneer values an America where our citizenry is well-educated and willing to test our beliefs based on facts and the free exchange of ideas, and committed to liberty, personal responsibility, and free enterprise.

Get Updates on Our Economic Opportunity Research

Related Posts:

Pioneer Institute Study Finds Wide Range of Approaches to Compliance with MBTA Communities Law

Lexington’s approach seen as a model BOSTON – As Massachusetts’…

Study: U.S. Immigration System Limits Benefits Foreign Students Could Provide

Slow, inefficient system that discourages entrepreneurship puts U.S. at a competitive disadvantage

Latest IRS Migration Data Show Exodus from Massachusetts Continues

Massachusetts shed more than double the amount of adjusted gross income (AGI) in 2022 than any year prior to 2020, making it fifth among states in net AGI out-migration behind only California, New York, Illinois and New Jersey, according to data released Thursday by the Internal Revenue Service. 

Study Finds Prevalence of Entrepreneurship Tied to Regulatory Environment, Portion of Immigrants

The prevalence of entrepreneurship is linked to both the regulatory environment and the portion of foreign-born immigrants in a jurisdiction, according to a new study published by Pioneer Institute.

Study Finds Supply Shortage at the Heart of Greater Boston Housing Crisis

Construction costs, land use regulation and zoning among…

Skill-based immigration could ease labor shortage

A recent Biden administration executive order that amends the Schedule A list, which identifies occupations experiencing labor shortages and allows immigrants in those occupations to expedite their employment in the U.S., could positively impact the hiring of skilled international workers for years to come — a welcome development as the country and Massachusetts struggle to attract talent amidst a worsening labor shortage.

Statement on Massachusetts Falling from 34th to 46th on Tax Foundation’s 2024 Business Tax Climate Index

Massachusetts policymakers should pay close attention to the latest evidence of the Commonwealth’s declining competitiveness. Last week, the Tax Foundation published its 2024 State Business Tax Climate Index, which showed Massachusetts’ ranking falling more than any other state, from 34th to 46th.

Poll: MA Voters Oppose Legislative Proposals to Change Tax Rebate Law

A strong majority of registered Massachusetts voters oppose a plan recently announced by state legislative leaders that would change the way tax rebates are distributed in Massachusetts under a state law approved by voters in 1986, according to a new poll sponsored by Pioneer Institute and the Massachusetts High Technology Council.

Installing bike and bus lanes requires public debate

The problem isn’t with the concept of bike lanes but, rather, the lack of public conversation or transparency. Municipal governments are changing the infrastructure and character of entire neighborhoods and small commercial centers with little input from those most affected.

Study: Immigrant Entrepreneurs Benefit N.E. Economy, Despite Facing Obstacles to Growth

BOSTON – Immigrants in Massachusetts and New England are more likely to be self-employed, but the businesses they own tend to be in different industries than those owned by the U.S. born, according to a new study published by Pioneer Institute.

Public Statement on the House’s Proposed Tax Reform and Budget

Pioneer Institute applauds key tax reform provisions advanced by the Speaker and House leadership, including a reduced short-term capital gains tax rate and implementation of a single sales factor apportionment. But leadership must do more to bolster the state’s economic competitiveness and slow out-migration of wealth and business owners that endangers the commonwealth’s economic future.

Licensing burdens thwart economic growth in Massachusetts

/
Immigrants account for 17% of Massachusetts residents but start a quarter of the Commonwealth’s new businesses. These entrepreneurs could create even more jobs that further lift wages and standard of living if not for the unnecessary obstacle of restrictive state and local occupational licensing laws.

Report: Immigrant Entrepreneurs Provide Economic Benefits, but Face Significant Obstacles

Immigrants have started a quarter of all businesses in Massachusetts despite making up just 17 percent of the state workforce, and those establishments appear to be more innovative than those founded by native-born Americans. Despite these contributions, shrinking federal visa caps and red tape are among the factors making it more difficult for immigrants to come to the U.S., according to “Immigrant Entrepreneurs and the Barriers They Face: An Academic Literature Review,” published by Pioneer Institute. 

Pioneer Institute Statement on Question 1

Yesterday, voters came closer than many expected to rejecting the largest tax increase in Massachusetts history, even though opponents were dramatically outspent by the unions that bankrolled the amendment to the state Constitution. 

Taxachusetts Must Be Stopped

Going back to the bad old days of Taxachusetts would be an almost unfathomable mistake. Between the $3 billion bombshell that upended the recent legislative session, the ambiguity about how the tax revenue will actually be spent, and the contrasting examples of neighboring New Hampshire and Connecticut, Bay State voters have plenty of reasons to come back to reality and reject the ill-conceived proposal to amend the Massachusetts constitution this November.

Study: Legislators Must Answer Key Questions Before Setting Policy for App-Based Rideshare/Delivery Workers

After Massachusetts’ Supreme Judicial Court declared an initiative that was to appear on the November ballot unconstitutional, the issue of how to classify app-based rideshare/delivery workers is back in the hands of the state Legislature.  A new study published by Pioneer Institute distills from the research literature eight questions legislators must answer before determining how to address this fast-growing industry.