California Continues to Lose Taxpayers to Other States. The number of taxpayers who move out of California each year ticked up in 2020 with the beginning of the pandemic. At the same time, the number of taxpayers who moved to California remained flat. Recently released IRS taxpayer data from 2021 and 2022 shows this trend has continued. As a result, annual net outmigration to other states nearly doubled—from about 170,000 people (taxpayers and their dependents) in 2019 to closer to 300,000 people—since the pandemic began. The state has long had annual net domestic outmigration, but the recent migration gap is now as large as the early 1990s gap that occurred when defense and aerospace contractors downsized after the end of the Cold War.
Share of Revenue Lost Due to Outmigration Also Continues to Grow. In the years leading up to the pandemic, foregone state personal income tax (PIT) collections associated with net outmigration reflected about half a percent of total PIT revenue each year. As of 2022, foregone tax collections due to net outmigration was 1.6 percent of 2022-23 PIT revenue, three times higher (or about 1 percentage point) than pre-pandemic levels. Foregone revenue increased more (three-fold) than net domestic outmigration of people (two-fold) because, prior to the pandemic, outmigration was concentrated among lower-income households. Since then, more middle- and higher-income households have moved to other states, meaning the effect on state revenue has been greater because these tax filers tend to make larger income tax payments.
Net Outmigration Only a Small Contributor to 2022-23 Income Tax Revenue Losses… State income tax revenue declined 27 percent in 2022-23. As state officials look to better understand the cause of the large revenue decline, it is reasonable to ask whether taxpayer outmigration was a major contributor. The most recent IRS migration data suggests it was not. Although outmigration did reduce 2022-23 revenues it likely was only a small contributor to the large revenue losses.
…But Continued Outmigration at This Pace Would Be a Drag on Future PIT Growth. Although net outmigration was only a small contributor to revenue decline seen in 2022-23 and subtracts only a small portion of total revenue in any given year, ongoing outmigration of at this level would be a drag on long-term revenue growth for the state. Over the last few years, outmigration has been a drag on PIT revenue growth of about 1 percent per year. This is nontrivial when compared to the long-term average growth rate of PIT revenue—7 percent per year. Looking ahead, should the heightened trend of net outmigration continue, it could drag PIT revenue growth below its long-term average. That being said, migration patterns are extremely difficult to predict. While it is possible the recent shift could represent a "new normal,” there is also a good possibility it will be temporary. In the past, migration has been marked by cyclical ups and downs, with large spikes in outmigration fading after a few years.
Net Outmigration of Taxpayer Income Flows Strongest to Southern and Western States. The IRS tracks the adjusted gross income of taxpayers who move each year. The figure below shows the net flow of taxpayer income from California since 2020. Net outflow of income associated with taxpayers who have moved is concentrated in Southern states – primarily Texas, Florida, and Tennessee – and neighboring Western states.