Soaking the rich won’t solve boom-and-bust cycles

California’s Democratic legislators just proposed to slap $8.2 billion in tax hikes on “the rich.” This might raise some quick cash, but it’s a recipe for recession and more of the revenue roller coaster that will only make the next budget crisis worse.

The Golden State’s most productive citizens already pay far more than their fair share. The top personal income tax rate in California is 9.3 percent, but with the mental health services surcharge – an additional 1 percent – people earning more than $1 million pay the highest marginal tax rate in the nation.

According to the Franchise Tax Board’s latest figures, Californians with adjusted gross incomes of $300,000 or more represent fewer than 2 percent of the total returns filed, yet they account for almost 55 percent of income tax revenues. This dependency on top earners exaggerates the revenue boom-and-bust cycle in California.

The Democrats apparently want to cast a confiscatory net over a larger segment of the population. Their plan includes two new personal income tax brackets, as well as a hike in the corporate tax rate. The proposals would create a new bracket of 10 percent that kicks in for couples making $321,000, as well as a bracket of 11 percent for couples making more than $642,000.

We’re no longer talking about the filthy rich. A moderately successful professional couple in California will face a higher tax rate than anywhere else in the nation.

A similar pattern holds true for corporate income taxes. The plan would raise the corporate rate from 8.84 percent to 9.3 percent. This would make California’s tax the sixth-highest in the nation. Four of the higher states post rates only a few tenths of a point higher.

This is not the way to attract new businesses and jobs.

Perhaps multimillionaire celebrities will stay in the Golden State no matter what, but the same does not hold for entrepreneurs and investors deciding where to locate companies, or professional couples starting their practices. The data on migration patterns are clear: Even modest increases in the top tax rate lead to a net exodus from the state.

In 2005, Cato Institute scholars Steve Moore and Stephen Slivinski prepared a report card on America’s governors, many of whom had raised taxes to deal with a recession. They found that tax hikes were the wrong answer: “[S]tates that hiked taxes in the early 1990s . . . simply created slower economic growth. For instance, the state that raised income tax rates the most, Connecticut, had job growth in the 1990s of just 4 percent. But Colorado, which cut incomes taxes substantially, saw a 45 percent increase.”

Slivinski updated his report card in 2006, comparing the top 10 tax-cutting states with the top 10 tax-hiking states from 1990-2005. The tax cutters saw employment grow 25 percent, personal income grow 119 percent, and population grow 21 percent. The tax hikers saw employment growth of 20 percent, personal income growth of 106 percent, and population growth of 18 percent.

Incentives really do matter, especially in hard times. The Democrats’ tax hikes will only intensify the boom-bust cycle for state revenue.

ROBERT P. MURPHY is a senior fellow at the California Pacific Research Institute and author of “The Politically Incorrect Guide to Capitalism” (Regnery, 2007).

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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