When Raising the Tax Rates Decreases Tax Revenues

From City Journal: Taxed Out

One thing you need to know is the Laffer Curve.

The Laffer Curve tells us that there exists a rate of income taxation at which increases to the tax rate will not generate any additional income for the government. Beyond that point, increases in departures or decreases in work or reported income will outweigh any revenue increases from the higher rate. Before Prop. 30, California was not over the top of the Laffer Curve—yet.

Prop 30 raised marginal tax rates from 10.3 to 13.3 percent. It passed in 2012 and took effect in 2013. "Tax the Rich" is popular in CA, but the rich can, and do, leave.

In 2018, the federal Tax Cut and Jobs Act capped state and local tax (SALT) deductions at $10,000. Another surge in departures from California ensued, as high-income taxpayers suddenly had to pay a lot more of their SALT bills themselves, rather than having taxpayers from other states pick up the tab for almost 40 percent of it. The upturn in departures was similar in magnitude to that following the 2013 spike, and it was concentrated among people who, tax simulations reveal, were particularly hard-hit by the SALT cap. Potential net outflows of taxable income from California hit nearly $4 billion in 2018—and this time, as I found in another analysis, the elevated departure rate persisted into 2019 as well.

California has apparently been over the Laffer Curve since 2018.

And since math is hard, I will point out that if you get $4 billion in "taxable income" to leave the state, that is a decrease of taxes, under a 10 percent rate, which isn't quite the case here, that is $400 million in taxes you are NOT collecting because people have left your jurisdiction. That continued in 2019. Now maybe fewer people left in 2020 and 2021, but I know some people fled the COVID insanity in California for places like Florida and Texas, because their businesses were decimated by lockdowns. Do you think that the exodus is going to be reduced this year or next?

The tax rate is set to increase again in 2024.

There is some analysis of where those wealthy Californians are going. Mostly to low-tax states. Hardly surprising, given that one of the reasons they are moving is because of taxes.