Taxed in the USA: Gov Brown’s New Penalty on Productive Californians

I would like to get to other topics than taxes, but again – it’s appropriations time and the people we have elected to populate our state legislatures and gubernatorial mansions are once again verging on panic over their states’ finances. So why not continue our Taxed in the USA series…

Today we hear about some real budgetary hand wringing out in California. Governor Brown is apparently running out of fiscal steam. When he came into office almost a year ago he was determined to rein in state spending. He went to great length to avoid tax increases and even let a small, temporary sales tax increase expire. Now, though, he has come under intense pressure from the insatiable spendoholics in Sacramento. Evidently, he has reached the end of the road when it comes to working with his Democrat buddies on spending cuts. According to the Christian Science Monitor he is going to beg taxpayers for another helping. He has…

…proposed a ballot initiative that would ask Californians to raise taxes on themselves. Facing huge deficits despite $10 billion in budget cuts last year, California needs new tax dollars in order to avoid catastrophic cuts to schools and government services for the elderly, Governor Brown said. His plan includes a 1 percent income-tax-rate increase for individuals making more than $250,000 per year, and a 2 percent rate increase for those making more than $500,000.

Today the second-highest income tax rate in California is 9.3 percent for individuals making at least $46,766. The highest rate is 10.3 percent for incomes above $1 million. The two new income tax brackets would steepen the marginal effect in the state’s income tax system. In other words, it would not only raise the top rate to 12.3 percent, but also enforce that rate from an income that is half as high as today. This means that a person making $1,000,000 (not unusual for successful entrepreneurs) will pay $236,500 in combined federal and state income taxes – on the last $500,000 he made. The total federal and state tax bill before any deductions on the $1-million income would top $439,000!

The reason for this is that state and tax rates combine into a marginal tax of at least 43 percent on everything you earn above $250,000. Then the taxpayer will have to pay local income taxes and property taxes – and he has not even gotten around to buying his first loaf of bread yet.

If this person moved his business to Anchorage, Cheyenne, Houston, Las Vegas, Miami or Seattle, where he would not have to pay any state income tax, he would save $112,000 per year. On state income taxes alone. For that money he could hire two people to come work with him and expand his business, and still pocket more money than he does in California.

But Governor Moonbeam is not done yet. His ballot initiative…

…would also increase the state sales tax by half a cent to 7.75 percent. In total, at least 10 initiatives that propose tax increases are vying to qualify for the 2012 ballot in California – a sign that the state that led the national tax revolt with Proposition 13 in 1978 might now be considering at least a partial reversal of course.

In one sense California never changed course. The state kept growing spending as usual after Proposition 13. But that aside, there are more numbers that should have Governor Brown worried. According to the Census Bureau’s 2009 American Community Survey of interstate migration, California had a significantly negative migration net. A notable 86,428 more people left the state than moved in to it.

Of that net loss, 75 percent went to three states with no income tax: Nevada, Texas and Washington.

With an even higher penalty on hard-working Californians, Governor Brown is making sure that the only business that will be thriving in his state is U-Haul.

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