California Can Tax "The Rich" All They Want, But it Will Not Stop the Flight of Businesses and the Working Class from the State...So Enough!
Last week California Assemblyman Alex Lee (D – San Jose) introduced two new measures – a bill and a constitutional amendment – as part of a nationwide drive by progressives to increase wealth taxes in California and other blue states, including New York, Illinois, Maryland, Hawaii, Minnesota, Connecticut and Washington state.
The taxes are branded as levies on wealth, but they vary in form. Some resemble Sen. Elizabeth Warren’s outline from 2021, which proposes taking a specific amount from large asset holdings each year regardless of whether they grew in value.
California’s plan would take 1 percent a year from households worth more than $50 million and 1.5 percent from those worth more than $1 billion. This would be in addition to their income and capital gains taxes paid each year to the state.
There is also another measure to hike income taxes on the wealthy planned for the 2024 ballot. The measure, officially titled the California Pandemic Early Detection and Prevention Initiative, would raise the top marginal state income tax rate from its current level to 14.05% on earnings above $5 million. The new top rate would remain in effect for 10 years.
The California bill would also require taxpayers with illiquid assets to file yearly reports on their holdings and eventually pay the tax, even if they move out of state.
Lee and others argue that wealthy Americans continue to use loopholes in the federal tax system to avoid paying billions of dollars in income taxes and their pact would limit the migration of the wealthy.
Everyone knows that the loopholes are there because elected officials, from both sides of the aisle, have been influenced by special interest groups to create a tax system by exception, while the majority of businesses and wage earners pay what they owe and a increasing number of workers find ways to operate in the informal economy where cash is king.
Meanwhile anti-tax advocates continue to chip away at federal tax rates. The 2017 Tax Cut & Jobs Act made our federal tax system less progressive…
…and clipped the wings of our nation’s most progressive state governments (California, New York, New Jersey, etc.) by capping of the federal deductibility of state and local taxes.
These states, more than low- and no-tax states in the U.S., have historically funded things, in partnership with the federal government, that the market can't or won't - feeding the hungry, caring for the sick, educating the poor, and building highways and railroads, to name a few.
As our federal government continues to operate like a healthcare system with its own military…
…California will need to find other ways, separate from our federal government, to generate revenue.
And the SALT cap adds insult to injury. Since 2018, millions of California’s taxpayers have sent tens of billions of additional tax dollars back to the federal treasury.
This in turn, thanks to politicized Congressional actions, facilitates the flow of these dollars to low-tax and no-tax states who continues to gain more from the U.S. Treasury then they put in.
Yet California needs to be careful. The less progressive the federal system becomes, the more California’s tax rates stand out, when compared to our country’s low-tax and no-tax states.
Trying to hold the wealthy hostage is silly. State officials need to focus more on how to incentivize businesses, high-wage earners and its working class to stay and invest in California.
Affordability is still drawing Americans to areas that are less dense and cheaper, particularly in the Sun Belt.
The $3.87 trillion for the American Rescue Plan (ARPA), Infrastructure Investment & Jobs Act (IIJA), CHIPS and Science Act (CHIPS), and Inflation Reduction Act (IRA), is bringing to life a new industrial agenda for the U.S., and states that are not California.
Look at the recent announcements of new opportunities around semiconductor facilities in Arizona, New York, and Ohio and battery plants in Georgia, Nevada, Michigan, and Tennessee. They are ready to compete.
The U.S. is also taking on the world trading system using export controls, subsidies and tariffs to better promote our nation’s domestic industries and will help to accelerate these investments and California must do a better job to compete in this new world order.
Instead what California continues to do is find ways to increase taxes, which grab headlines for the progressives, but at the same time they seem to forget the fact that their policies at the state and local level - sales tax, fees, license requirements, fines, the state lottery and other methods - are extracting money from the very people they say they are fighting to support??? Just look at how much the City of Los Angeles now makes off Angelenos from fines, fees and licensing. Hint - a more bustling economy would generate more sales tax, which is the cities third largest generator of revenues behind their fee movement.
In return, government policies and programs are not showing a great return on that investment. Because even with their best programs, CalFresh, energy rebates, internet grants, etc., the programs are not even close to reaching a greater majority of the population most intended to benefit. The other failures have hit enough headlines to not repeat here.
When people are unhappy they leave.
The 10 highest tax states lost nearly 1 in 100 residents in net domestic migration between July 2021 and July 2022, while the 10 lowest tax states gained almost 1 in 100, according to a recent analysis by James Doti, president emeritus and economics professor at Chapman University.
The U-Haul Growth Index, which measured more than two million one-way trips last year, found that the only other state with more than 30 million residents, California, ranked last on the index as demand for trucks out of the Golden State spiked.
The exodus from California, particularly of high-income earners, could prove problematic for the government's coffers as the top 0.5% of taxpayers pay 40% of California's state income tax, according to recent figures.
In 2020, the CA Department of Finance, shared that 1% of the total number of income tax returns that were filed were responsible for more than 49% of all the personal income tax that was paid in that year.
This stagnant population growth overtime:
Does not arrest the growth of state expenditures overtime:
Which means for those who remain in California and earn a income in the formal economy must cover a larger share of the tax burden, whether a progressive personal income tax rate as high as 13.3 percent or a regressive sales tax as high as 10.25 percent in some jurisdictions.
Carved over the entrance of the Internal Revenue Service headquarters building in Washington, D.C. is the quotation “Taxes are the price we pay for a civilized society.” U.S. Supreme Court Justice Oliver Wendell Holmes wrote those words in his dissent of - NFIB (National Federation of Independent Business) vs. Sebelius – which was addressing whether a government imposition is a tax or a penalty. Holmes went on to say that he could see no ground for denying a government’s “right to use its power to tax unless it can be shown that it has conferred no benefit of a kind that would justify the tax. . .”
The legislators behind the wealth taxes say their plans will fund social spending, and with the backing of the Fund Our Future, an advocacy group affiliated with the American Federation of Teachers, the beneficiaries are obvious.
This begs the question on whether the money will truly benefit students and teachers. Pension obligations (paying for the past) continues to place an enormous strain on education funding (paying for the future), and the public sectors ability to attract a pipeline of aspiring teachers.
A difficult task knowing that no matter how much funding is increased it is never enough to cover the necessary costs to manage the growing demands - mental health, public safety, fundraising - of a teachers time.
I see it first hand.
I have three kids in the public school system, and like most taxpayers have great expectations that elected officials and school officials will be sound stewards of my tax dollars. I am a big supporter of the leadership and work, in and outside of the classroom, of everyone in my district.
Unfortunately, the reward for their efforts, is a state bureaucracy that has been quietly redirecting a growing share of our district’s budget to other schools in the region, determined by the state’s local funding formula, to be in greater need.
Our district has its fair share of students in need, not just measured by financial levels. A significant number of students have undiagnosed learning and mental health issues that the system does not have the capacity to serve.
There is only so much the school staff can do, leaving kids out of luck or parents pulling more money from their personal budgets to pay for private services to help their own children.
At the same time, the district continues to look to parents to dedicate more of their after-tax dollars to the education foundation, the PTA, and other initiatives to solve the growing spending gaps.
The state already puts in billions annually to our schools…
while enrollment shrinks and results lag. Not to be a downer but no matter how many feel good micro stories we hear about, the macro results are not even close to being something we can be proud of.
At the local level the city of Los Angeles is also an exhibit of how tax payers are not getting a great return on their investment and city leaders have not learned their lesson because they continue to support tax initiatives that take more money from Angelenos and investors to put into a system that does not work for all Angelenos.
Not a lot of people know that the state of California took back control of a considerable pot of money allocated to help with rent relief efforts in the city because the housing authority did not have the capacity (or culture???) to properly manage it.
Secondly last September the LA Times reported that LAHSA returned more than $29 million to HUD; the Housing Authority of the City of Los Angeles returned more than $82 million; and the Los Angeles County Development Authority returned nearly $38 million in the past few years.
The county and city housing authorities blamed their underspending on a range of issues. The county housing authority cited insufficient workable housing units and client referrals, poor credit and rental histories among the homeless population and program attrition.
Understandable, but what of the issues of capacity and culture that inhibit the effectiveness of LA City and LA County government.
Robert Kennedy once said that progress is a nice word. But change is its motivator. And change has its enemies.
When things don’t change in government, civic minded groups step in and their solution is also more taxes.
United to House L.A., which was led by a sprawling multiracial coalition of labor officials, housing advocates, affordable housing builders, homeless service providers and working people, helped pass last fall, with a simple majority of voters, Proposition ULA, which will enact a 5.5 percent tax on properties sold or transferred for more than $10 million.
Eight percent of the money would pay for an auditor general and staff and the vast majority of the revenue would pay for new affordable housing construction and the acquisition of existing buildings for housing, with roughly 30% going to legal assistance and homeless prevention assistance, including subsidies to seniors and disabled people at risk of losing their homes.
In an LA Times article, Shane Phillips, the housing initiative project manager for UCLA’s Lewis Center, wrote a report that helped inspire Culver City’s transfer tax. He also co-wrote two reports studying the potential effects of Measure ULA.
He said the tax is a good way for property owners who have done well financially to contribute to solving city problems that come from the appreciation of their property values. Everyone is on the hook for the tax: residential homeowners, commercial property owners, developers, etc. He said that for most sellers the transfer tax shouldn’t be that big of a deal.
Over the last decade, property values have risen significantly, so a one-time tax isn’t that big of a burden.
After reading that I thought of this quote from a college class I took on Shakespeare and his Merchant of Venice:
“If to do were as easy as to know what were good to do, chapels had been churches, and poor men’s cottages princes’ palaces. It is a good divine that follows his own instructions: I can easier teach twenty what were good to be done, than be one of the twenty to follow mine own teaching.”
Developers invest and take on risk. The private sector is part of the solution to LA’s housing problem and the more you tax something, the less you get.
The proof is in the numbers. Ask any developers of housing where there top ten investments are being made…and please feel free to correct me in the comment section, if I have missed something.
As to Lee’s new bill, does it have any better chance of winning legislative approval than his previous version, which went nowhere. Fortunately, even with huge Democratic majorities in both legislative houses, far more than two-thirds, many Democrats are not supportive of voting for new taxes.
And even if the wealth taxes pass the Legislature, voter approval of the constitutional amendment is problematic and it is depressing to know that opposition camps and public employee unions, will once again spend hundred of millions of dollars on something that could have been put to better use toward the goal of equity for all.