Tuesday, April 12, 2016

State Taxes and Flight

As a follow up to my post, New Jersey: It Used to Smell, Now It Just Stinks, Tim Wangelin emails:
 About your posts today about David Tepper and the New Jersey taxes, California, especially after Prop 30, has the highest marginal rate in the country. Is there an exodus from California? Why are there so many high-income, high-profile, people living in California? Are people are willing to pay a premium to live in California or can effective California state tax rates be lower than the specified rates? I have been curious about this for the past couple years.
The effective tax rates in California and New Jersey are not much different from the nominal rates.

There has been and continues to be an exodus from both New Jersey and California. With regard to California, see, for example:The Great California Exodus: A Closer Look.

It's always dangerous though to think in terms of aggregates. Change often happens at the margins. In the case of high taxes, it will cause some people out but not necessarily all. Depending upon the severity of the taxes, some may stay becasue they have relatives in the area or a great many friends in the area. They may stay becasue they have jobs that would be difficult to replace in another geographic location. A business owner might have the type of business that is difficult to relocate, etc.

That said, the more oppressive the taxes, the more value scales tilt in favor of leaving.

In places where things are extremely oppressive, not necessarily in terms of taxes but overall oppressive, lots of people will leave, see Syria and Libya.



  1. I made a comment over the weekend to a couple who are friends of mine who are talking about moving to another area of California about an hour away (more than an hour away from most of the places we frequent). To me, moving that far away is, in effect, moving away from your friends. So I commented "if I'm moving away from my friends, I'm leaving the state."

    I'm only still here for my friends, and the fact that most of the hobbies I enjoy are more easily enjoyed here, and they are certainly exercised at a much higher level here than most places in the U.S. The weather is also a big factor (and helps to offset some of the cost of living here). The CA politicians are doing everything they can, however, to push everyone but the extremely wealthy and the extremely poor out of the state.

  2. California taxes: That's why Silicon Valley has always used stock options as a deferred salary. Build a company up, using the great pool of Valley smarts, change residency to a low tax state, then exercise the options. And when you cash out the stock, you pay long term cap gains. Shhhh don't tell the Franchise Tax Board.

  3. What Capn mike says is true but you have to exercise the option and hold the stock for at least 2 years I think, so they are not without risk. Another option for high earners is to have their employers gross up their compensation to cover the higher taxes. One thing I think most overlook is that California is really nice place to live. I would live there if it weren't for the insane taxes, real estate prices and regulation. But if you are already there and are established, these very negative things to outsiders like me, can create a country club effect by keeping competition (ie, people like me) out. People will pay huge fees to belong to exclusive clubs that limit the club's resources to a small group of people. High taxes are a great way to use government to do a similar thing. San Francisco is a prime example of the country club effect. The only way one can hope to be able to live in San Francisco is for them to be able to afford the insane taxes, deal with the control freakish level of regulation and outrageous real estate prices. I can assure you that if there ever was a campaign to reverse these things it would be the wealthy of SF fighting to keep them.

    1. I believe you have to hold it for 2 years from the grant date, but only 1 year after the exercise date. I think the shareholders' agreements usually prevent you from just exercising the shares and dumping them anyway (at least for major shareholders -- they don't want the owners to trigger uncertainty for the stock).

  4. A few years back I rented a vacation house in Carmel using vrbo. I had to send the check to the owner at an address in incline village, nevada.

  5. I asked a VC friend about Silicon Valley & why it remained successful. He's a rich guy who long ago moved from CA to OR and finally to FL. He flies his own jet everywhere including CA, OR, WA, TX, etc for business but lives in FL for taxes.

    According to him: SV is a unique place where nerds like the Woz & business savy leaders like Jobs & Venture Capitalists & Bankers & bright Asians & representatives from high tech companies big & small from everywhere including Asia stumble across each other in local coffee shops & restaurants. Years ago Gates may have shown up at random. All these people are there to meet others in support of their own talents & offerings. A nerd may explain a new idea to a business man he just met who then says, “Wait right here, I want you to meet. . .” It started by Stanford not only teaching top engineering & such, but professors teaching & aiding their students to bring high tech gadgets to life & to market. There is no simple way to get such disparate but inter-dependent people to all up & go somewhere else.

    But there is a trickle out. Many years ago several of high-techs moved to OR & WA for a better business climate. Intel has not expanded in CA for decades because of CA. Other universities across the nation are doing what Stanford does. Some techies & companies are moving to Austin, N Carolina & such, all of such places growing better for tech.

  6. Just returned to San Diego from Austin Texas where the MotoGP (the highest form of motorcycle road racing) and MotoAmerica races were held over the weekend. I am friends with some of the people involved in the sport. One of these friends (a British MotoGP rider) and his wife are planning to move to San Diego. I know this riders salary to be about $1million plus contingencies and endorsements, so the tax burden is substantial. Their reason for the move is simply the environment. They may have a plan to avoid some of the taxes that we did not discuss but my impression is that their environment was worth the extra taxes and other higher cost associated with the area.

    An almost opposite situation is another friend that runs one of the MotoGP teams that is planning to move from a very nice area in Italy to Dubai. This is all about taxes, although he did mention the international flavor of Dubai as an aspect. But in the end he was reasoning that his profession has him away from home 160 days a year so, including non-work travel, he will only be living in Dubai half the time.

    Even though I have many reasons to live in San Diego, family, friends, job, etcetera, the main reason I endure the higher cost of living is the environment. I have not traveled a lot but have been a number of different places and have not experienced any that I would rather live.

    1. San Diego is a particularly nice area of California. It's also becoming a sort of Silicon Valley II. I do contracting/consulting for software development, and have been working a contract in SD for 3 years now (telecommuting). Keeping an ear to the ground -- as contractors must -- most of the other good opportunities I've seen have also been in SD.

      I have a few friends in SD, but if I were to move from the greater LA area, it would still probably be to another state. The bureaucracy, and tax burden of California has increased to the point where it may be impossible to stay here.