But You Can Never Leave

By IPI President Tom Giovanetti

"For seven straight years more Californians have left the state than have arrived. In fact, it costs 4x as much to rent a U-Haul from California to Texas as it does from Texas to California."

The Golden State seems intent on driving its productive residents away.

USA Today ranks California as having the 14th highest state and local tax burden among the 50 states. It might surprise some that there are 14 states with higher tax burdens, but California seems intent on climbing up the rankings.

This fall, Californians will vote on two ballot propositions that would raise both property taxes and the top income tax rate even higher. You’d have to REALLY love California to stay a resident if those propositions pass.

That’s why so many Californians are leaving. For seven straight years more Californians have left the state than have arrived. In fact, it costs 4x as much to rent a U-Haul from California to Texas as it does from Texas to California. Mark Perry of the American Enterprise Institute says that Californians pay a “huge premium” for U-Haul rentals because the supply and demand is so far out of balance with Californians fleeing the state.

But it gets worse. In fact, it seems that Don Henley of the Eagles was a bit of a prophet when he sang of the Hotel California, “you can check out any time you like, but you can never leave.”

That’s because the California Assembly is now considering a wealth tax that would include a 10-year exit tax. That’s right—if you decide California’s escalating taxes are just too much for you, California would try to continue to tax you for 10 years after you left the state.

In anticipation of the flood of wealthy Californians who would flee the state in order to avoid this new wealth tax, the proposal also includes an exit tax to ensure that no one escapes the “loving embrace of the California Franchise Tax Board.” The wealth tax would be assessed against former Californians for 10 years.

Now, such an exit tax is almost certainly unconstitutional, as states are not permitted to tax outside their borders—although the recent Supreme Court Wayfair decision throws such precedents into uncertainty.

More to the point, Albert Hirschman’s seminal 1970 book Exit, Voice and Loyalty explains that institutions function so long as participants have the options of voice or exit. In any organization of which you are a member, you can try to exercise influence over the organization (voice), or failing that, you can leave the organization (exit).

But failing organizations with a totalitarian impulse try to stop people from leaving, depriving them of the exit option. Literal barriers to exit are what we saw in communist countries in the 20th Century. And in the example of California’s proposed exit tax, we are watching in real time the tendency of socialist policies to gradually move toward totalitarianism.  You might be able to leave California’s disastrous policies, but they will punish you.

Today's TaxByte was written by IPI President Tom Giovanetti.