Top Tax Bracket Backlash: California's Higher Earners Weighing Move

Sometimes it’s not good to be the king. And in California, higher earners are feeling a little put upon.
by | February 7, 2013

Sometimes it’s not good to be the king. And in California, higher earners are feeling a little put upon.

Congress approved a tax increase on high-income earners in January, a move that came months after California voters approved a tax hike for the state’s wealthy. The combo prompted pro golfer Phil Mickelson to complain that his new tax burden may cause him to relocate to a friendlier state (which then prompted Texas Gov. Rick Perry to invite Mickelson to come to the Lone Star State, which does not tax personal income).

Although Mickelson quickly dialed down his ire, others share his sentiment, according to a new report from Bloomberg News. Although by no means an exodus, more top earners in California are contacting their financial advisors about whether they should relocate.

“It’s a double whammy,” JD Montgomery, managing director at Newport, Calif.-based Canterbury Consulting, told Bloomberg, referring to increased federal and state taxes. “We are at a tipping point.”

Teresa Ridge, senior director of planning in California at Wells Fargo & Co.’s unit that caters to those with at least $1 million invested with the bank, told Bloomberg one of her clients recently bought a home in Nevada, which does not tax income. Her firm is also helping another California-based client buy a second home in Nevada, where he plans to move within the next five years.

“These are people with the means and resources” to act, she told the news agency.

In California, voters approved an income tax increase retroactive to Jan. 1, 2012 that upped the rate on income exceeding $1 million by three percentage points to 13.3 percent, the highest in the nation. Federal tax increases passed on Jan. 2 this year increased the top income-tax bracket to 39.6 percent from 35 percent for individuals earning more than $400,000 or households earning more than $450,000.

That means top earners in California are now paying a top marginal rate of more than 50 percent, according to Bloomberg.

In contrast to states like California, a handful of Republican governors this year are vying to add their states to the “no income tax” list. Louisiana, Nebraska and North Carolina governors have all said they want to eliminate their state’s income tax, citing increasing competition from other states. Seven other governors have said they want to lower their state’s income tax.

But whether such tactics -- raising or lowering income taxes -- has a direct effect on taxpayers’ decisions to stay or go is debatable. Some experts note that a lower income tax or none at all often comes at the cost of decreased services. In addition, among states that don’t have an income tax, Alaska, Texas, South Dakota and Wyoming rely heavily on oil-related revenues to buoy their budgets.

Still, the Bloomberg story notes, increased taxes can also come at a cost. Some higher earners say they plan to cut back on their charitable contributions this year.

“Instead of giving a couple grand to charity, I’m keeping it,” John Franson, a 42-year-old financial analyst in Boston, told Bloomberg. “A good portion of our income and any increase in our income will be taxed at the 39.6 percent federal rate, which doesn’t make us want to work much more.”

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