State leaders closely watch migrating millionaires Leaders keep close watch on migrating millionaires

Golfer Phil Mickelson apologized after hinting he might leave California because of a jump in his tax rates. Golfer Phil Mickelson apologized after hinting he might leave California because of a jump in his tax rates. Photo: Jared Wickerham, Getty Images Photo: Jared Wickerham, Getty Images Image 1 of / 4 Caption Close State leaders closely watch migrating millionaires 1 / 4 Back to Gallery

(01-13) 12:36 PST -- When golfer Phil Mickelson hinted last January that he might leave California because of a big jump in his federal and state tax rates, it was met with such venom that he later apologized, saying it was insensitive to state his opinion publicly when people are living paycheck to paycheck.

Mickelson still lives in California, but other wealthy people say they have moved out mainly or partly because of skyrocketing tax rates. Whether you sympathize or not, millionaires' migrating out of California has serious consequences to the state's bottom line and is something state leaders are watching closely.

In 2011, the top 1 percent of tax returns accounted for 41 percent of the state's personal income tax revenues, and that was before Proposition 30 raised rates on the rich. Meanwhile, about half of California adults paid no state income tax that year, according to an estimate from the state Finance Department.

Bryan Goldberg, who founded the Bleacher Report sports website and sold it to Turner Broadcasting for about $200 million in mid-2012, is moving his primary residence from San Francisco to New York this year. A major reason, he says, is Prop. 30 and the way it was applied retroactively.

Taxes in New York City, where he has started a new website, Bustle.com, are also high. Goldberg says his exodus "was more about creating a statement than it was about maximizing my personal income."

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Prop. 30, approved by voters in November 2012, raised state income taxes retroactively to Jan. 1, 2012, on singles making more than $250,000 and married couples making $500,000. It raised rates by one, two or three percentage points through 2018, bringing the top rate on incomes above $1 million to 13.3 percent, the highest in the nation.

Avoiding income tax

Lee Schneider, a hedge fund salesman who works from home, also cited Prop. 30 as the "deciding factor" for his move from Walnut Creek to Austin, Texas, in 2012. The California native had recently built a $2 million house at the foot of Mount Diablo and took a loss on the sale, but "I can make half of it back in one year of tax savings," he says.

About the data: Roughly 92 percent of California cities in the FBI’s 2014 Uniform Crime Reports database were mapped, and all cities in the Bay Area are represented. The small cities of Vernon and Industry, which had the highest property and violent crime rates in the state by huge margins, were intentionally removed to prevent skewing the data.

Schneider's neighborhood in Texas, which has no state income tax, is full of cars with license-plate frames from California dealerships. On a flight from Austin to Los Angeles shortly before Christmas, 11 of the 12 seats in the emergency row were occupied by people who had moved from California to Texas, he says.

Another telling statistic: On the Nevada side of Lake Tahoe, where there is no state income tax, 151 homes sold for more than $1 million in 2013. That was 86 percent higher than the previous year. On the California side, only 67 homes sold for more than $1 million, down 9 percent from 2012, according to Susan Lowe, a broker with Chase International.

Filling the coffers

It's too soon to say whether these anecdotes represent a larger trend, but state leaders realize the growing dependence on personal income tax revenue. The Legislative Analyst's Office predicts that they will comprise a record 66 percent of the state's total general fund revenue in 2014-15. Before Prop. 30, personal income tax revenues had exceeded 60 percent of the general fund only once, at the end of the dot-com boom.

Thanks in part to a capital gains windfall, Gov. Jerry Brown's budget proposal released last week estimates that Prop. 30 alone will generate $5.7 billion in additional income tax revenues in fiscal 2014-15. That represents 5.4 percent of total general fund revenue, projected at $106 billion.

The budget makes no allowance for migrating millionaires. "There is no compelling data in the economics or demographics to cause us to do that," says H.D. Palmer, a spokesman for the California Department of Finance. Research suggests "there is no correlation between higher marginal rates and out-migration."

One study he cites was conducted in 2012 by two Stanford sociologists at the request of state Board of Equalization member Betty Yee. It found almost no increase in out-migration as a result of the 1 percent mental health services tax that California began imposing on taxable income greater than $1 million in 2005.

The Prop. 30 tax increase is much larger than the mental health surcharge, but what angered some people more than its size was its retroactivity.

Entrepreneurs hit

During the five years he was building Bleacher Report, Goldberg took little salary. "I worked really hard, built a great company, created 150 jobs, mostly in San Francisco," he says. The payoff came in 2012 when he sold the business. At the time of the sale, the top state tax rate was 10.3 percent, but when the tax was due it was three percentage points higher.

"I have no problem paying taxes. You often get better services as a result of taxes," Goldberg says. But "I consider retroactive taxes to be a form of asset seizure. Prop. 30 was a particularly egregious example because it was targeted at a specific group of entrepreneurs."

The state knew that initial public offerings were coming back in 2012 and that employees of Facebook and other tech companies would soon be exercising options worth billions of dollars, he says.

Robin Wolaner of San Francisco, who founded Parenting magazine and sold it to Time Inc., favors raising taxes on the wealthy. But she too says making Prop. 30 retroactive was unfair. "Changing the rules after the game has started is completely unjustified."

Wolaner recently became chief executive of Vittana, a nonprofit in Seattle, but won't move to Washington even though it has no state income tax. "Rich people grumble about taxes," she says. But "I have personally never known anyone who is so driven by taxes" they would move. "The people I know in Silicon Valley are driven by making money."

Financial and tax advisers say they have wealthy clients who have fled the state, ostensibly for tax reasons, but the clients don't want to be identified because they fear the kind of reaction Mickelson got or an audit from the Franchise Tax Board. "It's a sensitive subject," says Ken Naehu, a financial adviser in Westwood (Los Angeles County) who knows three neighbors or clients who left for tax reasons.

Moving out, moving in

Billionaire Charles Johnson, who retired as chairman of Franklin Resources in June, moved from California to Florida - another no-income-tax state - in 2012. Johnson, majority owner of the San Francisco Giants, has owned a home in Florida since 1988 and has lived there part time with his wife for many years, he said through a Franklin spokeswoman.

The couple donated their Hillsborough estate, the Carolands, to a foundation in 2012 for preservation as a historic landmark. Johnson says the move was long planned but did not comment on whether taxes played a role.

"Everyone has a story about someone who moved away and attributed it to taxes," says Cristobal Young, co-author of the state's millionaire migration study. "The reality is, every year some people move out and some people move in. How people rationalize their decision to migrate depends on the climate and whether they are upset at the moment."