February 21, 2013 | Back to: Columns

California making mistake by chasing away its wealthy

What would the rich do if they would lose millions of dollars just because they lived in California? Move? Many high income earners will probably be doing just that. Millionaires will most likely flee the Golden State because their overall tax rate is now the highest in the nation: 13.3 percent. And California has the nation’s highest taxes on businesses, which is another reason to jump ship.

Those in a high income bracket can thank the governor for their upcoming exodus — an unintended consequence derived from soaking the rich to pay off California’s debt. What exactly happened?

Governor Jerry Brown’s tax hike was specifically designed to get the budget under control. The passage of Proposition 30 in November increased state income taxes by a maximum of three percentage points for seven years. It targeted the affluent in an attempt to pay California’s long-overdue bills. But instead of paying exorbitant taxes, many of the well-to-do are planning to move away in order to avoid paying taxes to the state.

Roughly 63 percent of California’s general revenue fund comes from personal income taxes. It would be foolish for a rich person to remain in California, especially considering the fact that the state’s wealthy 1 percent have already paid about 40 percent of the state’s overall taxes.

Who can blame them for wanting to keep their money? There’s big savings in store for those millionaires willing to make the move out of state. In January, Tiger Woods admitted he moved to Florida in 1996 because of California’s excessively high tax rates. He stands to save $7.5 million by not living in California this year alone.

The state remains highly vulnerable financially to any sizeable decrease in the number of wealthy taxpayers abandoning ship. Governor Brown’s budget balancing depends on the wealthy too much. The state can’t just keep extracting more and more money from the rich as if they were an endless supply of cash.

Florida, Alaska, Nevada, South Dakota, Texas, Washington and Wyoming don’t have a state income tax. Nevada is attracting many California millionaires, especially to the Tahoe area. And Texas has started attracting quite a few, too. Even though Texas and Florida do without income taxes, their state governments rely on property, sales and other taxes for sources of revenue, which still makes no-income-tax states beckoning safe havens for the escaping rich who want to hold on more to their money.

But many argue that cutting taxes for the rich will grow the state’s economy. Do tax cuts for the well-to-do stimulate California’s economy? The nonpartisan Congressional Research Service questioned the impact of tax cuts on the wealthiest Americans. The CRS found that cuts in the tax rate “do not appear correlated with economic growth.” Furthermore, the CRS said cutting top tax rates don’t appear to boost saving, investment or productivity. So the notion that cutting taxes for the rich stimulates the economy simply isn’t true. Taxing the rich does an economy good, however, despite the elitist belief that higher taxes are an unfair burden on the rich.

The state’s economy — at one time blessed with bountiful aerospace, agriculture, high-tech and international trade — hit bottom several years ago. Being able to climb out of the fiscal abyss depends on the rich paying their fair share. The governor may be overly optimistic in claiming the worst is over. But if the rich don’t pay up, his projected plan is merely burnt toast.

The rich may want to leave, but businesses have already been leaving for awhile now. This is the seventh straight year that CEO magazine named California as the worst state to do business with. Why? The Golden State ranks No. 1 in poverty, lawsuits, the cost of energy and lost profits, and it has the most over-regulated business environment in the nation. In fact, in terms of poverty, California, with 12 percent of the U.S. population, has one-third of the nation’s welfare recipients.

It’s not a business-friendly state. Regulations in California are a hindrance to profit maximization. So the exodus of jobs, coupled with the rich leaving California for greener pastures, no doubt will adversely affect the state’s economic health even more.

The state’s not out of the woods just yet. There’s still a lot to be done. At the state capital, Democrats not only need to rein in spending, but they should eliminate most of the cumbersome regulations handicapping businesses. The state is chasing businesses and the rich away. It can’t go on like this.

David Briceno lives in Grass Valley.

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The Union Updated Feb 21, 2013 11:12PM Published Feb 23, 2013 08:31AM Copyright 2013 The Union. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.