Higher Taxes = Business Departures = Lower Tax Revenues
State Controller Betty Yee’s just-released July Cash Report shows state personal income tax revenue falling behind estimates by 6.9 percent, or $323 million lower than projections. While some will argue that one month does not make a trend, these figures are significant because they represent revenue in the first month of the new state budget, a budget that is based on much higher income estimates.
Should these below projection income tax revenues really be a surprise to anyone with even a minimal understanding of basic economics? Economists tell us that if you want less of something, tax it more, and California has the highest marginal income tax rates in all 50 states.
When upper income individuals were slammed with tax rates on steroids as a result of Proposition 30, approved by voters in 2012, they had little immediate choice but to pay, and the tax revenue poured in. (It should be noted that the tax, approved in November, was retroactive for the entirety of 2012 so there was an almost instantaneous infusion of cash into state coffers.) Still, many compelled to pay these higher taxes took some comfort in knowing the exorbitant tax rates were scheduled to end in 2018.
However, lawmakers viewed this extra revenue as the new normal and they partied on in Sacramento with ever higher state budgets — they have increased spending by 42 percent in the last five years and there is no end to the spending spree in sight.
While the Sacramento politicians are loath to give up this additional cash next year as scheduled, the report from the Controller’s Office shows that the negative consequences of higher taxes, like proverbial chickens, are coming home to roost.
Most high income individuals are savvy and, given time, those penalized with a confiscatory level of taxation will respond by using legal methods that allow them to keep more of their own money. I personally know a veterinarian who cut his salary while retaining the unpaid wages in his business, a small animal hospital.
Sadly, over time, other successful individuals have packed up and left the state. This helps to explain the exodus of businesses, and the jobs they create, to other areas of the country with a more attractive tax climate.
A recently released study by Spectrum Locations Solutions estimates that over the last seven years, 9,000 business have either divested in California, or, while maintaining their headquarters here, have chosen to expand elsewhere.
“Gov. Jerry Brown’s office routinely denies that business departures is a serious issue,” says Joseph Vranich, a site selection consultant, who prepared the report. Brown’s denials are consistent with State Senate and Assembly leaders who see no down side to ever higher taxes.
Of course those businesses leaving the state are not just fleeing higher income taxes, high taxes in almost every other category are a factor, as are the costs of suffocating regulations.
But for those paying the ultra-high income tax rates, no relief is in sight. California government employee unions, who represent the highest paid public workers in all 50 states, are fielding a ballot measure – Proposition 55 – that will extend the Proposition 30 tax increases for another 13 years.
There is little doubt that just the threat of extending these hyper income taxes, will spur more high earners to depart. If Proposition 55 passes this November, there will be consequences for the California taxpayers who remain. When Sacramento runs out of higher income individuals to tax, they are certain to shift their attention to those of more modest means.
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Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization, dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.