(Bloomberg Opinion) – After Covid-19 arrived in 2020, many wealthy people left locked-down California. Elon Musk, the second richest man in the world, moved to Texas, saying Golden State had become “a little complacent, a little self-righteous.” Venture capitalist Keith Rabois headed to Miami, saying that “San Francisco is just so poorly run and managed that it's impossible to stay here.” Other notable tech figures decamped for Nevada, Colorado, Wyoming and elsewhere.
It may come as a surprise, then, that the number of California residents with incomes of $1 million or more increased by 61,900, or 66%, from 2019 to 2021, according to statistics released last week from the Internal Revenue Service. Booming asset markets and rising wages significantly increased the number of tax millionaires in every state, and their number doubled in Montana, Idaho and Utah, but the percentage increase in California was above average. Its share of American millionaires rose to 17.9% in 2021 from 17% in 2019, while those of the next three most populous states filled with millionaires — New York, Texas and Florida — fell.
It's not like the exodus of wealthy Californians was a mirage. From 2020 to 2021 (more precisely, from when people filed their 2019 taxes to when they filed their 2020 taxes), 403,041 taxpayers with an average adjusted gross income of $125,362 left California for elsewhere in the US and only 241,216 median income. $87,072 was transferred in. (IRS will release 2021-2022 migration data in June.) But rising incomes in the state brought in enough new local millionaires to replace all those who left and then some.
This revenue growth owes much to the spectacular growth that California-based tech companies experienced in 2020 and 2021, and the accompanying series of initial public offerings. The subsequent decline in tech — the Nasdaq Composite fell nearly 60% from the end of 2021 to the end of 2022 — means the state's share of US millionaires is likely to drop in tax year 2022. However, since then, a boom in artificial intelligence based in San Francisco has led the Nasdaq to records, and Musk AND Rabois are back part-time (though I imagine they'll keep their primary residences in Texas and Florida, which don't have a state income tax). California has a long history of ups and downs in weather technology and the departure of the exasperated rich and continues to come out on top.
As you can see from the chart above, it's a different story for New York, which is ranked fourth in population after Florida. passed it in 2014 and now it is barely standing in second place in the ranking of tax millionaires. it Was an analysis of New York's declining percentage of millionaires by EJ McMahon of the conservative Empire Center in what inspired me to dig into this IRS data. So what's up with New York?
State and local taxes are definitely a factor, and New York has the highest in the country. Florida is 11th lowest, from Tax Foundation Accounting, and the state has long been a popular retirement destination for wealthy Northeasterners and Midwesterners. The sharp upward movement in Florida's share of millionaires in the 2017 tax year (which reflects where people lived when they filed their 2018 tax returns) may have had something to do with the $10,000 limit on the state and local tax deduction set by Congress in late 2017. , which increased the payoff for moving there from a high-tax state. (Low-tax Texas seems to have benefited, too.)
But why then has the share of millionaires increased and increased for California, which has lower taxes overall than New York but similar income tax rates for high earners? Why has Texas's declined over the past decade?
Changes in the fortunes of key local industries also matter. In Texas, the millionaire boom in shale oil production that began around 2010 faded in the middle of the decade, then returned as a more efficient phenomenon dominated by Big Oil that doesn't seem to be making Texans all that rich. In New York, the millionaire-heavy financial sector has ceased to be a growth industry, with employment in financial activities statewide and in New York City now lower than it was in 1990. Connecticut and neighboring New Jersey have have also experienced large declines in their share of millionaires since 2010. Meanwhile, the booming tech sector has made big gains in the share of millionaires since 2010, not only for California, but also for Washington, Colorado and the Carolinas of the North.
Movements of millionaires can have a major impact on state finances. In 2022, according to the Census Bureau, individual income taxes generated 59.5% of state tax revenue in New York and 52.1% in California (the national average was 38.2%). In both countries, millionaires i pay AROUND 40% of the individual income tax. Because higher incomes tend to move up and down along with asset prices, this means much more revenue volatility than in states (such as Texas and Florida) that rely primarily on sales taxes. It also feeds chronic worries of an exodus of millionaires that could make it impossible to pay the bills.
There was such an exodus in 2020 and 2021, but booming asset markets more than canceled it out. The number of tax millionaires in New York increased from 2019 to 2021 even as the state's share of American millionaires fell, and while according state data the number of millionaires fell in 2022, it remained 24% higher than in 2019. However, New York has lost ground compared to the rest of the country. California, for all its doubters, has not.
More from Bloomberg Opinion:
- New York still has enough Rich people to pay bills: Justin Fox
- Bezos' Miami Move Nothing to do with Washington taxes: Jonathan Levin
- You can not Stay still for high taxes: Merryn Somerset Webb
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Justin Fox on (email protected)