California’s liberal Democrats in control of state government just can’t do enough to help boot-out corporations and high-wage earners from the state. Now they are pushing to change the state tax code to tax corporations not on their profits, but on their level of “high income disparity” between top executives and the average worker in the business.
In 2012, liberal Democrats supported and passed an initiative that raised the state income tax to the highest levels in the nation and made it retroactive on millionaires. Coupled with an additional 1% “millionaires” tax imposed during Arnold Schwarzenegger’s reign as Governor, the top marginal income tax rate in California is now a whopping 13.3% of income, more than New York State’s and New York City’s top marginal income tax rates combined. When added to federal tax rates in the top marginal tier, California’s most successful wage earners paid a 52.9% income tax rate in Federal and state taxes last April 15. At least the top wage earners who actually still live in California paid 52.9%.
In the last year, real estate transactions in lovely Incline Village, a not too far away play-land for Silicon Valley executives just across the Nevada border, have sky-rocketed. Sales of estates are hitting record levels, and Incline Village has advanced to one of Coldwell Banker’s top 20 real estate markets in the nation. And the reason isn’t just for the skiing or great views of Lake Tahoe. The real estate boom in northern Nevada has everything to do with the fact that Nevada doesn’t have an income tax.
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California doesn’t just have the highest state income tax in the nation. It leads the rest of the country in almost every category of taxation: the highest state sales tax, the highest taxes on gasoline at the pump, and the highest corporate tax west of the Mississippi. And the taxes aren’t doing much for the people of the state, rich or poor. For the first time in history, the Census Bureau reports that California is also the poorest state in the nation, with 23.8% of the population living in poverty, in large part because of California’s high cost of living (which is not helped by all the sky-high consumption taxes the Democrats have enacted and the poor must pay to survive.)
CEO Magazine has proclaimed that California is the worst state to do business in, because of its pervasive regulations, for each of the last nine years. But California’s liberal Democrats who run things in Sacramento don’t seem content with having already enacted policies that encourage top wage earners to leave the state for one of the many lower tax states in the nation. Now they are intent on enacting further disincentives to business investment in the state, and to actually encourage wholesale export of business corporations and the jobs they create, by radically changing the way the state taxes businesses in order to address “high wage disparity,” otherwise known as “income inequality.”
The new legislation, known as “Senate Bill 1372,” would raise state corporation taxes not on profits. If passed, California’s already high current corporate tax of just less than 9% would shift to a new formula in 2015 based on the corporation’s median compensation of employees as compared to the highest employee, rather than to simply tax profits. According to the Sacramento Business Journal, if the corporation’s top paid executive made 100 times the median worker salary in the company, the company’s tax rate would rise 9%. Companies paying the top earner 400 times the average salary would pay a 13 percent tax rate. But if the chief executive made just 25 times more than the average wage earner, the corporate tax would be just 7%.
California’s newly proposed corporate tax system turns the whole purpose of taxation – which is to fund government services – upside down. Instead, the purpose of the corporate tax would not be to fund government; rather, it would be to force income distribution outcomes dictated by the government and not market forces. The result? Punishing ailing California companies just coming out of the recession, like San Francisco-based Wells Fargo. California based companies already stressing over a persistently poor business and regulatory climate would not be able to afford the best talent to manage their businesses. Combined with high levels of taxation, Senate Bill 1372 is simply an open invitation to the nation’s most successful corporations to simply pick-up stakes and take their high wage earners (as well as all their jobs) out of state. It is more-or-less a “last straw.” At a time and in a state where unemployment remains 20% to 25% higher than in the rest of the country, where the poor are getting poorer, and where the top 5% of wage wage-earners pay 62% of all state income tax, this new “high wage disparity” threatens California’s economic future; and the bill is sheer insanity.
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This post originally appeared on California Political Review and is re-posted with permission.
James V. Lacy’s first book, Taxifornia, is available at Amazon.com.