California Governor Jerry Brown has been touring the Golden State for the past few months championing Proposition 30, his estimated $9 billion per year sales and income tax increase. The measure, if approved by voters on November 6th would increase the state sales tax, already the highest in the nation, 0.25% to 7.5% for four years, and raise the state income tax on those earning more than $250,000 annually – by no means a hefty salary in certain parts of the state – for seven years.
One of the more egregious aspects of Brown’s proposed measure is the retroactivity of the income tax increase, which would apply to all income earned after January 1, 2012. Brown’s effort to impose this retroactive tax hike makes it clear to businesses that if they want some semblance of certainty in tax planning, they must leave California. Campbell’s Soup, Comcast, and Samsung have been the latest to come to this realization; either shutting down facilities in-state or moving operations outside of California.
California residents already contend with one of the most progressive tax codes in the country. Not only does California have high marginal rates, those high rates kick in at relatively modest income levels. California’s middle class residents earning $48,000 a year, for example, pay a state tax rate of 9.3%. Millionaires in 47 other states don’t even pay that high of a marginal rate. However, one of the state tax code’s greatest flaws is it’s over-reliance on upper income households and the revenue volatility it creates, and that is a problem that Prop. 30 would further exacerbate.
As of 2010, the state relied upon 144,000 households, 1 percent of taxpayers, for 50 percent of total state income tax. If Proposition 30 passes, the top 10 percent of earners would be responsible for over 80% of the projected income generated – a fact that Gov. Brown and other advocates of the bill readily acknowledge. The state’s current overreliance on high income households results in drastic revenue swings throughout the business cycle, making budgeting all the more difficult. California’s reliance on volatile revenue sources has been on display with the diminishing price of Facebook’s shares since the company went public. At the peak of share costs, the Legislative Analyst’s Office predicted the shares cashed in by stockholders would account for 20% of the growth in California’s personal income this year: a figure that will fall short hundreds of millions of dollars of these early projections.
In a joint letter on the revenue impact of Prop. 30, Department of Finance Director Ana Matosantos and Legislative Analyst Mac Taylor stated, “estimates of the revenues to be raised by this initiative will change between now and the November 2012 election.” There’s a huge difference between the $6 billion and $9 billion dollars that Taylor and Matosantos estimate Brown’s tax hikes will generate. Even if Brown’s tax hikes are approved by voters, the budget would remain in the red due to chronic overspending by California’s legislators.
Brown is proving to be the ‘70s retread in practice that he is on paper. Prop. 30 represents a continuation of the decades old tax-and-spend policies that have caused residents and businesses to flee California in droves to escape the state’s onerous tax and regulatory burden. Chief Executive magazine’s annual survey of 650 corporate CEOs on the business climate in their states has ranked California the worst state for businesses for eight years in a row.
Raising taxes on California residents and businesses is not going to solve the state’s structural overspending problem. Only necessary spending restraint will cure what ails the Golden State. Without the reforms necessary to achieve that spending restraint, California’s economic situation will inevitably resemble that of Greece. Even if Brown’s tax hikes are approved by voters, state revenues will still be unable to keep pace with the state’s unsustainable spending directory. It increasingly seems that, like their counterparts in Illinois, California lawmakers are expecting the federal government to bail them out of their mess. Fortunately, Paul Ryan and other Republicans in Congress see this coming and have introduced legislation to prevent a taxpayer bailout of deadbeat states, which ATR supports.