HomeBudget & Tax NewsCommentary: Will California's Government Raise Taxes Even More?

Commentary: Will California’s Government Raise Taxes Even More?

These 12 politicians have co-authored a bill to amend the California constitution to make tax rates permanently higher and impose an excise tax, payroll taxes, and a special income tax.

The excise tax would be a stiff 2.3 percent on businesses for all their gross receipts over $2 million. That’s gross receipts, not net receipts.

A typical business’s profit in the United States is about 8 percent of gross receipts. So this 2.3 percent tax would amount to a 29 percent tax on a business’s profit.

To add insult to injury, the bill’s authors say the tax would be imposed “for the privilege of doing business” in California. And here I thought doing business was a right, not a privilege. Silly me.

A basic principle in the economics of taxation is that a tax rarely sticks where it lands. Translation: whoever pays the tax almost never bears the whole burden. The payer passes on at least some, and often much, of the burden to consumers.

That’s especially true for a state tax. The reason: businesses are free to move to other states and they will do so until the before-tax rate of profit rises in California to compensate businesses for staying. That means higher prices.

That’s not the only tax that would rise.

The constitutional amendment would also impose a .5 percentage point tax increase on incomes between $149,509 and $299,508, a 1 percentage point increase on incomes between $299,508 and $599,012, all the way up to a 2.5 percentage point increase on incomes over 2,484,121.

This is outrageous for two reasons.

First, these tax increases would cause many high-income people to leave California, even though the government depends heavily on high-income people to finance its profligate spending. When high-income people leave in response to tax increases, the state government doesn’t just lose out on the revenue that would have been generated by the additional tax. It loses all the revenue that high-income people would have paid.

Second, it’s unfair. We often hear that “the rich” should pay their fair share. People who say that rarely say what the rich’s fair share is. But with current income tax rates on high-income people ranging from 9.3 percent to 12.3 percent, California is way beyond that point.

The amendment would also impose a 1.25 percent payroll tax rate on employers who employ 50 or more California residents. An additional 1 percent payroll tax would be imposed on all employers for pay to employees above $49,900. Nevada is starting to look awfully good.

And what would these revenues be used for? To fund single-payer health care. That’s because, you know, single payer has worked out so well in Canada. The measure would also pay for health care for illegal aliens.

Fortunately, if the bill passes the Assembly and Senate, Californians will get to vote on it in November. I’m betting that we’ll defeat it.

And if we don’t? Well, as I said, Nevada is looking awfully good.

Originally published by  Institute for Policy Innovation. Republished with permission.

David R. Henderson
David R. Henderson
David R. Henderson is an Emeritus Professor of Economics at the Naval Postgraduate School in Monterey, California, a Research Fellow with the Hoover Institution at Stanford University, and a Senior Fellow with Canada’s Fraser Institute. He was previously a senior economist for health policy and for energy policy with President Reagan's Council of Economic Advisers.

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