The Corner

Economics

California Wants to Double Its Taxes

A demonstrator wears a “Tax The Rich” t-shirt during a protest in Los Angeles, Calif., August 3, 2020. (Mike Blake/Reuters)

Jared Walczak of the Tax Foundation wrote a blog post yesterday with news that doesn’t seem possible: California — an already high-tax state — wants to double its tax revenue.

No matter how Walczak breaks down the proposed constitutional amendment, the numbers are astounding. It would increase the top marginal income-tax rate to 18.05 percent. That’s 7.05 percentage points higher than Hawaii, the next highest state, and 12.75 percentage points higher than the national median. It would increase taxes by an average of $12,250 per household. “All told, the new tax package is intended to raise an additional $163 billion per year, which is more than California raised in total tax revenue any year prior to the pandemic,” he writes.

It’s not just income taxes, though. The state wants to implement a payroll tax as well, with the top rate applying to taxpayers making only $49,990 in annual income. Currently, only Massachusetts and Nevada have payroll taxes that do more than fund unemployment insurance, Walczak writes, and Nevada has no individual income tax at all.

Walczak points out this oddity that would result from the way the payroll-tax proposal is written:

For instance, the payroll tax exempts employers with fewer than 50 resident employees, punishing small businesses for expanding and creating a meaningful tax cliff. Imagine, for instance, the overly simplified hypothetical of a company with 49 employees making $80,000 each. At 49 employees, the company has no payroll tax burden. Hiring one additional employee generates a tax bill of $90,000 — more than that employee’s salary!

The most insane part of the proposal, however, is a 2.3 percent gross-receipts tax. Only seven states levy gross-receipts taxes, which are especially harmful to economic growth because they are based on business revenue, not profits. Even if businesses lose money, they still pay the gross-receipts tax because they still made revenue, even though costs exceeded that revenue.

Most gross-receipts taxes, however, are below 1 percent. California’s proposed rate of 2.3 percent is basically a giant flashing neon sign that says, “Don’t open a business here!” Walczak notes that the gross-receipts tax “would be imposed in addition to tangible property taxes and an 8.84 percent corporate income tax, and an aggressive one at that, the only state-level corporate income tax in the country with a worldwide tax base.”

If this proposal is adopted, California would essentially have 18 tax brackets, and individuals making less than $50,000 per year would wind up paying double-digit marginal tax rates.

Why does California need all this money? To fund CalCare, its proposed single-payer health-care system. If you want European-level government benefits, you have to pay European-level taxes.

Calling these taxes European-level is actually doing a disservice to Europe, however. The top marginal federal income-tax rate is 37 percent. That means the combined state-federal top marginal income-tax rate in California under this proposal (the actual burden that taxpayers would have to face) would be 55.05 percent. That’s a higher top marginal rate than Belgium, France, Germany, Greece, Italy, the Netherlands, Norway, Portugal, Spain, Sweden, or the United Kingdom. The only European countries with top marginal rates higher than 55.05 percent are Finland at 56.95 percent and Denmark at 55.9 percent.

Progressives know they can’t impose taxes like this on the federal level, so they’re giving it a try in a state they control. (Now do you see why Democrats wanted the SALT deduction so badly?) That’s federalism — more power to ’em! — but if this amendment passes, California Democrats shouldn’t be surprised when people move to Arizona or Nevada. California already lost 0.8 percent of its population in 2021. This proposed constitutional amendment could hardly be better designed to make sure that population decline continues.

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