How Far Can California's Progressive Tax System Go?
Quote of the Week
"Politics it is said, is the art of the possible. But possibilities are shaped by our decisions as much as they are by our circumstances. As matters currently stand, when future generations place leaders in historical perspective, they will most likely reproach them, above all, for their lack of institutional imagination."
Dani Rodrik, Professor of International Political Economy, Harvard University
Big Picture
Three years ago I met with a senior tax analyst for the State of California. I asked him what he believed the state's personal income tax rate could be increased to, beyond the top rate of 13.3%, before it started influencing a greater number of taxpayers to flee the state.
His answer - 19%.
Today I am willing to bet that his number would be lower based on a few new factors:
COVID has provided a growing number of high wage earners more opportunities to work remotely out of state.
The 2018 Jobs and Tax-Cut Act created a less progressive federal tax system, providing more of an incentive for California's high-wage earners and corporations (and their workforces) to increase their gains by fleeing to states with low and no taxes.
These same states are taking advantage of these trends by aggressively marketing new tax and business incentives to attract businesses, entrepreneurs, and skilled-talent from California.
Part of the problem with this question has always been a lack of timely tax data from the Franchise Tax Board. I have been told that there is an unwillingness from the State Legislature to provide the FTB's staff with the necessary funding to help thoroughly analyze the impact of the state's tax policies on wage earner migration patterns.
Academic researchers and state analysts are left looking over data years later trying to determine how tax changes from initiatives like the mental health tax, props 30 and 55, and reduced SALT deduction, have impacted the migration of the state's tax payers, levels of business investment, entrepreneurialism, and worker productivity levels.
Without a true and timely baseline, no one really knows how any new proposal to increase taxes will ultimately impact the State's economy and future growth.
This allows progressive legislators and special interests to keep pushing for more taxes.
This year, Lyft and Uber submitted a ballot measure, that if passed, would establish a new 1.75% state income tax on individuals earning more than $2 million in income to subsidize the building of more EV stations throughout the state and to fight climate change.
This formula works well when times are good because California's progressive tax system is so skewed toward the small numbers - in 2019 the top 0.5% of taxpayers paid 40% of state income tax and capital gains are now a larger share of personal income-tax revenue than at any point since 1999. And everyone like taxing the rich when the state's median income level is $30,777.
This progressive formula just produced a historic $98 billion surplus that is fueling a first ever $310 billion state budget. To put this into perspective, California’s surplus alone is bigger than the budget of every state besides Texas, Florida and New York.
When you add in the $27 billion California received in federal relief dollars there exists a euphoria in the spending of "other peoples' money" to paraphrase Milton Freidman.
The Wall Street Journal Editorial page couldn't help themselves and recently expressed their critique of California's free spending ways, but to get a better sense of the real challenges we face with our current tax system, and the implications to our economy, I would recommend a more balanced and thoughtful Op-Ed: California’s economy may seem healthy. But just wait for the next recession by Joel Kotkin and Marshall Toplansky in the LA Times.
For now the California Business Roundtable has set out to curb this progressive trend, by spearheading a $50-70 million campaign to pass an anti-tax measure designed to strengthen the ⅔ vote required on new tax increases. Backers hope that this measure will help amplify anti-tax voter sentiment in November.
But in all reality, if California truly wants to stop losing more of its high income earners, residents, businesses and entrepreneurs to other states, they should be honest about how its current tax policies are contributing to it.
Californian's Out Migration
The 2021 Allied x Zillow Magnet States Report shows that consumers continue to flock to Florida, while people moving for work are going to Texas.
Driving force??? The average interstate mover in 2021 moved to a ZIP code where homes were about $35,800 cheaper than where they came from. But these moves are driving up prices in new areas.
For the last 5 years Texas, North Carolina, South Carolina, Florida and Arizona has been in the top 10 inbound states while California, Illinois, Michigan, Pennsylvania have been in the top 10 outbound states.
The top destination cities for people who moved for work in 2021 were:
Houston
Dallas
Chicago
The top cities that people moved to for reasons other than work in 2021:
were:
Phoenix
Dallas
Washington, DC.
Bay Area Remains Global Hub of Innovation
New research from the Bay Area Council Economic Institute finds:
The vast majority of foreign-based companies and governments with tech and innovation hubs, accelerators and investment offices located in the area remain open and;
Have actively resumed activity with a growing number of delegations, business visitors and startups returning to the region.
Another report from Mind the Bridge in 2021 shows just how dominant and resilient the region is:
Silicon Valley scaleups are 4.9 times higher than in New York, about 7 times more than in LA, 10+ times more than Boston/Cambridge and Austin, and 30+ times more than the other hubs.
CA's leaders can thank this sector for the state's current $98 billion surplus. Capital gains collections have increased roughly fivefold since 2010. Income taxes, mostly from the very wealthy, which barely constituted one-third of state revenues in 1980, now make up two-thirds.
More Subprime Borrowers Are Missing Loan Payments (WSJ)
What to watch:
Borrowers with limited or troubled credit histories are defaulting on credit cards, car loans and personal loans.
Delinquencies on subprime car loans and leases hit a record in February, based on Equifax’s tracking that goes back to 2007.
Consumers with low credit scores are falling behind on payments for car loans, personal loans and credit cards, a sign that the healthiest consumer lending environment on record in the U.S. is coming to an end.
Better news:
In the U.S., nearly 1 in 3 consumers have a subprime score—but this population has shrunk by 12% since 2020, according to Experian data. Among the consumers who have subprime scores, many improved aspects of their credit over the past year.
Overall, millennials represent the highest ratio of subprime consumers of any generation. In 2021, 40% of millennials had a score in the subprime range, according to Experian data. The subprime millennial population has seen an 11% reduction since Q1 2020.
Concern: LA is home to a great number of subprime borrowers and consumer and small business confidence in the direction of the economy is worsening. A recent national survey showed that 57% of small business owners expect economic conditions to worsen in the next year.
CA Dominates EV Market
CA has strong EV incentives for both manufacturers of electric vehicles and buyers – creating the biggest EV market in the US and making EVs more profitable for manufacturers. (CA New Car Dealer Association Q1 2022 report)
Tesla’s deliveries have increased 83.7% so far this year, helping CA achieve a new record of 15% market share for all-electric vehicles in CA.
The Model 3 holds a massive 65% market share in the near-luxury car segment and Model Y holds a 55.5% market share in the highly competitive luxury compact SUV segment.
Electric Cars Are Cheaper Than Most Consumers Think
A new study based on how buyers finance their car purchases finds that month-to-month, EVs cost less than gasoline models in most states.
The Energy Innovation Policy and Technology highlighted that in most US states an electric car can be cheaper on a monthly basis than a comparable gasoline car.
Data: Analysts looked at financing costs; state taxes and fees; state and federal rebates and tax credits, especially the $7500 federal tax credit; fuel costs; maintenance costs; and insurance costs.
Chart: The top 5 states with the lowest costs for three of the six models studied are shown on the chart above. California offers many EV incentives but those are offset by the high price of electricity.
Homeless: The Rand Institute Weighs In
Rand's new report: Recent Trends Among the Unsheltered in Three Los Angeles Neighborhoods showed:
Between late September 2021 and January 2022, the total number of people experiencing unsheltered homelessness and associated vehicles, tents, and makeshift structures averaged 1,358 in Skid Row, 685 in Hollywood, and 523 in Venice.
Across this period, the overall number across these areas increased by around 17 percent.
Nearly all respondents indicated interest in receiving housing; nearly half reported previously being offered housing, and one-third indicated that they were currently on a housing waitlist.
Around 80 percent of respondents said that they would accept a private room in a shelter or hotel, a permanent stay in a motel- or hotel-like setting, or permanent supportive housing.
About half would accept interim housing with access to services, shared housing, or safe camping. Less than one-third would accept an offer of group shelter or a recovery or sober living housing offer.
More than 75 percent of respondents have been continuously homeless for over a year, and more than 50 percent have been continuously homeless for more than three years.
New news that is not good news: The share of respondents identifying as Black/African American was 38 percent higher in our sample than in 2020 data from the Los Angeles Homeless Services Authority, while the share of respondents identifying as Hispanic was 24 percent lower.
Housing: LA Coalition Supports Key State Bill Proposals
AB 2097 (Friedman): Residential and Commercial Development: Parking Requirements
Will eliminate requirements that homes and commercial buildings near transit or in neighborhoods with less car use be built with more parking than is necessary. By reducing the over-building of parking, this bill would reduce traffic, greenhouse gas emissions and air pollution, and reduce the cost of housing to renters and homeowners.
Will prevent the wasteful overproduction of parking spaces and reduce car dependency and carbon emissions. It will also encourage greater transit usage and more housing and business growth near transit, helping to create revitalized and pedestrian-friendly commercial corridors and downtowns throughout California.
Does not prohibit property owners from building on-site parking. Rather, it gives them the flexibility to decide on their own how much on-site parking to provide, instead of requiring compliance with a one-size-fits-all mandate.
AB 2011 (Wicks): Affordable Housing and High Road Jobs Act
Would simultaneously address our affordable housing, jobs, and climate crises by pairing new opportunities to build affordable housing on underutilized commercial sites with unprecedented labor standards that ensure all construction workers earn prevailing wages and receive health benefits.
With thousands of these commercial sites across California, this would allow production of new affordable housing units at scale, without changing the density or character of existing residential neighborhoods. One recent analysis found the potential for two million units in just Santa Clara County and Los Angeles County. The bill also includes new homeownership opportunities for middle-income Californians, while promoting climate-friendly affordable development on sites close to jobs and transit.
Ballot Initiatives to Watch
California Art and Music K-12 Education Funding Initiative (2022) proposes (1) Dedicating additional funding to arts and music education in public schools – without raising taxes. (2) Ensuring every school in California benefits, with additional funding for schools serving low-income communities to ensure all students have access to the arts; and (3) Including strong transparency and accountability measures to ensure the money gets spent effectively. The measure is expected to formally qualify for the November ballot by June 13 and more than 70% of voters support the measure based on the campaign’s most recent statewide survey. The benefits of the measure are obvious, but the challenge is by not having a new dedicating revenue stream the state would need to earmark existing revenue.
“United to House LA,” a voter initiative that is likely to be put on the November 2022 ballot. If approved by a simple majority vote, it would raise more than $800 million/year in the City of Los Angeles to build and preserve thousands of affordable housing units for very-low-income households as well as to prevent homelessness. More specifically the measure would generate $8 billion over 10 years, by imposing a new two-tier fee on the sale of high value property in the City of Los Angeles as follows: (1) The full value of the transfer of property from $5,000,001 to $10,000,000 will be taxed a single time at 4% and (2) the full value of the transfer of property of more than $10,000,001 will be taxed a single time at 5.5%.
Measure BB. The City of Los Angeles is proposing to amend the Los Angeles City Charter to provide an additional contracting bid preference to businesses located in the City of Los Angeles. With this change the City would then be permitted to provide an additional bid preference for businesses which are located within the geographic boundaries of the City of Los Angeles. (The LA Coalition has been a leader on pushing the city and county on better leveraging procurement as a economic development tool since 2015 and the key on this matter is to not only make sure more Angelenos benefit from the city spend, but to also ensure that it does not increase costs to the City's budget.)
Leadership in the Community
L.A. County is set to adopt the LA River Master Plan on June 14 creating opportunities for 100 miles of public trails along the river, as well as park projects that restore habitats and improve water quality.
This opportunity now exists because sparse rainfall in Southern California mean's that the river is only needed for its flood control functions roughly 2 percent of the time.
Although the master plan does not effectuate any specific investments along the river, the document identifies 56 potential projects between the San Fernando Valley and the South Bay.