California’s finance office has found that more than $1 billion a year in just personal income tax hangs in the balance because of the probability of people and companies moving out of state due to the high cost of doing business and home prices.
With so much at stake, the agency that manages the tax revenue generated from these transactions has started to examine the effects of the population’s net migration. At times, the research may prompt more questions than answers.
California Controller Betty Yee released a report last month using 2019 data, titled “The Impact of Migration on California Income Tax Revenues.” The agency surmised it’s too soon to tell whether those moving out of the state during a pandemic year have upset the balance of government financial coffers, even if a steady flow of migrants have moved in.
From 2015 to 2018, the data showed a net reduction in tax revenue from those coming in compared to residents departing by 0.2% of California’s personal income tax revenue. The state stands to gain or lose at least $1 billion in personal income tax revenue from residents in flux because of the gap between the departing residents paying in the previous year and migrants handing over payments the year after arrival, the Controller’s Office reported. In that respect, the shift represents a strain on state coffers.
The state’s income tax ranges from 1% to 12.3% — with an additional 1% surcharge on taxable incomes of more than $1 million.
When a business wanders
Since California first adopted a corporate income tax in 1929 and a personal income tax six years later, finance stakeholders have asserted high tax rates would squash the state’s economy.
Nevada jumped on that opportunity in 1937 by mailing out brochures to thousands of millionaires across the nation suggesting they relocate to low-tax Nevada. The Silver State boasted no corporation, state income and inheritance taxes.
A top-of-mind issue with rising costs causing many to flee California, businesses leaving the state totaled 18,000 between 2008 and 2016, according to data analyzed by CNBC.
“We are not aware of any popular reports on the number of businesses moving to California, so it is not clear what the net movement of businesses is,” the report reads.
The comings and goings of companies out of the state are hard to measure from tax data because a business may simply cease to exist and therefore not pay. The issue becomes more complicated when only part of the business moves. There, the state sets the tax bill as a “single sales apportionment,” which accounts for the percentage of sales made in that state.
Another consideration to resident and business migration is a lesser-known feature of California tax law called “source taxation.” California imposes tax bills on all business income earned in the state regardless of where the owner lives. So if an owner flees the state but continues to operate a business in California, the income is still taxed.
What happens when property tax revenue during a state exodus or home sell-off is reduced — especially since many local governments allowed residents to delay tax bills due to COVID-19 hardships?
“It’s too early to tell,” said Barbara Green, who works as the change-in-ownership supervisor in the Sonoma County Assessor’s Office. At this point, the local government’s tax management division is too busy to make that assessment because of the multitude of applications to transfer taxes from one property to another within the state’s boundaries for the over age 55 subset, she said.
The basis for Proposition 19, approved by voters last fall and effective at year-end, may account for a massive reduction in property tax revenue for each jurisdiction, especially if a resident is migrating in from a less expensive locale.
To Napa County Assessor John Tuteur, migration may hinge on the generation that’s moving. “It depends on what age we’re talking about. If we’re talking about the (age) over 55, they’re taking advantage of the tax transfers. But I would guess that more than half the homebuyers are under 55,” Tuteur said. “What in-state migration we’ve had has helped.”
SUSAN WOOD | NB BUSINESS JOURNAL
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