As the results of a new state income tax in California, a number of high-income earning individuals and small businesses are considering leaving the state.
In November, California residents voted to pass Proposition 30 into law. The law increase state income tax rates for the highest income earners. With the new law in effect, the highest earners—those making more than $250,000 per year—now pay state income tax of 13.3 percent.
While the increase in tax is expected to net California an additional $6 billion in revenue annually, the high-income earners affected by the change are not happy about it.
The new state income tax gained significant attention recently when professional golfer Phil Mickelson stated that he was looking to move out of the state because of the new income tax. Mickelson later retracted his comments, noting that it was not appropriate to air his personal issues publicly. However, many others share a view similar to that expressed initially by Mickelson.
“If you have excessive regulations and excessive tax, that’s just not where you want to be,” said Peter Farrell, the president of ResMed, manufacturer of medical equipment based in San Diego. ResMed has 600 employees, but the organization is considering relocating its offices outside of California.
“California is unfriendly. It’s become an unfriendly business environment,” continued Farrell.
A state many Californians might consider when relocating is Texas, which does not have a state income tax. That is exactly what another San Diego-based business, Fallbrook Technologies, has announced it is doing.
George Ashley, a tax accountant who lives and works just across the state line from California in Lake Tahoe, Nevada, noted that he has received over a hundred requests from individuals and businesses about the tax advantages they would receive if they moved from California to a state with a lower or no state income tax.
“We have had a 10-fold increase from various parts of California, particularly Los Angeles and the Bay Area where many people are seeking a way to leave the state,” said Ashley. “They are fed up with the situation and they feel like they are being unfairly treated.”
The wealthy were already paying a significant portion of California state income tax. Based on 2010 tax figures, those earning over $250,000 per year were accounting for 62 percent of state income tax revenue. Those earning over $450,000 were paying 46 percent of state income tax.
“As soon as Prop 30 happened, I saw just a huge change in the mindset,” said Matt Bradvica, a certified public accountant with McGladrey. McGladrey is a nationwide tax advisory services company.
“It was almost as if that pushes it to the limit,” noted Bradvica. “There are other states out there that have no income tax at the individual level. And so if you can save 13 percent in your business by residing in Nevada, for instance, which is a zero tax state, then I need to consider doing that.”
Many California residents are in fact now former residents, having already left the state as a result of the higher tax rate.
“It never stops,” noted one unnamed wealthy individual. “Pay a little more this year. Pay a little more pay here. Pay another business tax here. There is no end. So we decided to end it, and left.”
As a result of relocating to Arizona, the individual is saving over $20,000 per month when compared to rates paid in California. With such savings available to wealthy individuals who relocate, California may see the number of wealthy individuals residing in the state drop considerably in the 2013 and 2014 tax years.
Mark has been a contributor to legal web sites related to bankruptcy, tax, and criminal law since 2011. He has an Accounting degree from Texas A&M University.