Higher Taxes in CA = No Catastrophe

September 5, 2013

Earlier this year, the California legislature bucked the common thinking and raised taxes on its highest wage-earners, along with increasing several other taxes. And contrary to popular belief and extremely loud opposition at the time, the state has not fallen into the economic disaster that was predicted.


New Taxes in 2013

Among the taxes that were increased on all Californians is the sales and use tax, which was increased from 7.25% to 7.5% on a temporary basis, for 4 years. The state also raised its per-gallon tax on gasoline, effective July 1, by 3.5 cents.  The average driver now pays 70.1 cents per gallon, which is the highest rate in the country.

By far the most disturbing tax for small businesses, however, and the one that claimed the top spot in heated discussions throughout the late summer and fall of 2012 is Proposal 30, which raised the income tax on high wage earners. A single taxpayer making over $250,000 will now pay a top marginal rate of 10.3% ; this rate used to apply only to those making over $1 million. The proposal, which was passed by voters in November, introduced new rates of 11.3% for individuals making over $300k, 12.3% for those making over $500k, and a new top rate of 13.3% for those making over $1 million per year.

Proposition 30 was a combination of two previous initiatives, Governor Brown’s first income tax increase proposal and the so-called “millionaire’s tax”.  The increase in income tax rates gives California the highest rates in the country, outstripping the #2 state (Hawaii) by over 20%.

Vocal Opposition

The California Chamber of Commerce, which represents business interests in the state, immediately declared Proposition 30 to be a “job killer”. The organization now maintains a website, CAjobkillers.com , where it publishes information related to potential legislation that it deems “a threat to California’s ability to retain and create jobs.”

In January, pro golfer Phil Mickelson made waves by declaring that the new income taxes might force him to move out of the state. Other business owners have been slightly more circumspect in their disapproval, and other states have made moves to welcome disgruntled Californians with open arms.

Statistics Tell the True Tale

However, the opponents’ claims that the tax increase is a job-killer and that millionaires will be fleeing the state in droves, driving the state’s economy into the dirt, have proved relatively unfounded.

tax_timeBeacon Economics recently released a report that showed that California’s addition of 38,000 jobs in July accounts for nearly 25% of the nation’s July job growth. The report also notes that California actually accounts for only 15% of the nation’s labor market, so the state’s contribution to monthly job growth is actually greater than its population would suggest.

And, on another positive note, 40% of the new jobs are in the Business and Professional category, where salaries tend to be higher and benefits tend to be better, than in the retail and services sectors.

Additionally, the report concludes that the state is still adding jobs at a rate that is roughly commensurate with that of the nation as a whole, despite the increase in income and sales tax rates. It is, however, a bit lower than the rate that the state was adding jobs prior to the passage of the bill.
While the state still suffers from a high unemployment rate, the new employment figure stands at only 3.7% below the peak July employment of 2007, showing that the jobs recovery is still on the uptrend.

Too Soon to Really Tell?

Have the new taxes encouraged many high-income earners to move to lower-tax states like Texas? Have these people taken their companies, and their jobs, with them to these new states?

Ultimately, it’s only been eight months since the tax increases went into effect, but at this point it seems that the forecasts of doom are definitely premature. As a senior economist at the UCLA Anderson School of Management commented,  “The data are not such that there is a discernible pattern in California distinct from the U.S.”

In the meantime, Cajobkiller.com has turned its focus to other legislation pending in the state, such as AB 10, the Automatic Wage Increase bill, which would raise the state’s minimum wage from the current $8 per hour to $10 in automatic increments over the next five years.