Tax Day has come and gone and the Tax Foundation has just released its annual Tax Freedom Day Report. The results should come as little surprise to Californians: our state has the ninth-highest total tax burden in the nation.
On average, Americans must work 116 days to pay for government, giving them a Tax Freedom Day of April 26. The average Californian will work 120 days to pay off his tax burden.
This high tax burden has real consequences. Computer giant Apple is reportedly setting up a company called Braeburn Capital to manage its cash and short-term investments. Cupertino-based Apple is incorporating the new venture in Nevada because of the Silver State’s favorable tax and business climate.
Apple is hardly the first business to leave California for “greener” pastures. Numerous surveys in recent years have revealed that many California companies are restricting job growth or moving to other states due to the high costs of taxes and regulations. According to the Nevada Economic Development Partnership, 38 California businesses relocated or expanded to Nevada in the 2003-04 fiscal year, resulting in 1,500 jobs lost to our eastern neighbor, at least in part because of the favorable business climate there.
Small business owners are particularly hard hit by California tax policies. According to the California Taxpayers’ Association, the richest 10 percent of earners pay almost 75 percent of the entire income-tax revenue in the state, and most of these are small-business owners. Thus, under California’s backward tax policy, the very entrepreneurs responsible for economic growth and prosperity are being punished the most severely.
Various studies comparing economic freedom and tax policies across the nation confirm what an increasing number of individuals and businesses have come to realize: California’s taxes are overly burdensome and are stifling economic growth in the state.
The Pacific Re-search Institute’s 2004 U.S. Economic Freedom Index took a look at 143 variables to measure states’ economic freedom. These measures were divided into five categories: fiscal, regulatory, welfare spending, government size, and judicial (property rights). According to the survey, California ranked 49th overall, ahead of only New York. Among the subcategories, it placed 48th in fiscal, 48th in welfare spending, and dead last in regulatory.
Similarly, the Fraser Institute in Canada and the National Center for Policy Analysis studied economic liberty among the 50 states and 10 Canadian provinces in their 2005 Economic Freedom of North America report. The organizations analyzed 10 variables in three categories (size of government, takings and discriminatory taxation, and labor market freedom) and found that California ranked 43rd among the states.
Yet another study by the Tax Foundation released in February of this year compared the burdens of states’ corporate, individual, sales and gross receipts, and unemployment insurance taxes, as well as a wealth index. Once again, California proved lacking, placing 40th overall on the State Business Tax Climate Index.
Unfortunately, things are even worse for individuals than they are for businesses. California ranked 47th in terms of individual taxes, largely because its 10.3 percent rate on income over $1 million is the highest marginal rate in the nation.
You might think this would be reason to shy away from additional tax increases, but, alas, even more tax hikes may be on the way.
State Treasurer and Democratic gubernatorial candidate Phil Angelides has said that, if elected governor, he would raise taxes on the highest income earners to give more money to K-12 education. This would be on top of the $3 billion increase in education spending last year and the $4 billion increase proposed by Gov. Arnold Schwarzenegger this year.
The tax proposals do not stop there, however. Angelides also supports Rob Reiner’s Proposition 82, a June ballot initiative that would raise income taxes 1.7 percentage points on individuals making more than $400,000 a year ($800,000 for families) to raise $2.5 billion for a boondoggle universal preschool program. Recall that Reiner was also behind last year’s percentage-point income-tax surcharge for mental-health subsidies and the 50-cents-per-pack cigarette tax increase of the late 1990s for children’s health care.
Given California’s tax-happy political culture, it is no wonder the wealthy and the successful are leaving the state in droves. According to the Wall Street Journal, the number of Californians reporting million-dollar incomes plummeted from 44,000 in 2000 to 25,000 in 2003,at a cost of $9 billion in lost tax revenue. Even the stock market downturn after the “dot-com” bubble burst cannot account for such a dramatic decline.
It is time policymakers finally learned the lesson of the early 1990s, when an increase in the top income tax rate to 11 percent elicited a mass migration of the wealthy to more friendly environs and a fiscal crisis ensued. Less than a decade later, it appears California is intent upon repeating its costly mistake.
Adam B. Summers is a policy analyst at the Los Angeles-based Reason Foundation and a contributor to the Libertarian Perspective.
