Although having the nation's highest tax rate, California is considering raising the wealthiest Californians' income taxes to a level not seen anywhere in the country in years, it was reported on Friday.
After years of income taxes steadily dropping elsewhere, California would raise the effective rate on those earning at least 1 million dollars to 12 percent, more than twice the rate inmost other states that have income taxes, the Los Angeles Times said.
Although legislative leaders are weighing a plan to balance the budget in part by raiding transportation funds and local government accounts, many Democrats are still rallying around an income-tax increase as the best way to bring the budget into balance over the long term, said the paper.
Economists and money managers, though, are wondering whether California would be returning to this well one time too many. There is, they say, a point at which the cash infusion is outweighed by damage done to the economy: Entrepreneurs get driven away. Profits get stowed in tax shelters. Companies shelve plans for expansion.
"The more a tax sticks out like a sore thumb, the more taxpayers will look for ways to avoid it," said Robert Ward, deputy director of the Nelson A. Rockefeller Institute of Government in Albany, N.Y. California's income tax on its highest earners "would be a significantly higher rate than in any other state." Rhode Island's is the next highest, at 9.9 percent.
Proponents of tax hikes, though, say there is no evidence that meaningful numbers of high earners follow through on threats to leave. The number of wealthy Californians continued to swell after the last tax hike targeted at the rich, a 1 percent surcharge on income above 1 million dollars that was approved by voters in 2004,according to the California Budget Project, a think tank that advocates for low-income Californians.
And a study by the Public Policy Institute of California concluded that the state's job growth typically keeps pace with the national average.
People need not move away to avoid a tax increase. Those who handle money for the wealthy are already working on strategies, the paper said.