Tuesday, December 6, 2011

Examining Governor Jerry Brown's Proposed Tax Increases

(Updated 27-MAR-2012)

NOTE:  This analysis is for Governor Brown's initial tax hike proposal.  Due to political infighting with the California Federation of Teachers (CFT), Governor Brown has modified his proposal to be more like the CFT's so-called "Millionaires Tax."  Essentially, the new plan has a smaller increase on sales tax revenues, has significant additional income tax increases on upper-income taxpayers, and extends the "temporary" increase to seven years.  A new analysis is in the works but all of the arguments against the increase still hold true. 

It looks like California Governor Jerry Brown is out with his proposed "fix" for California's budget shortfall.  Turning to his exhaustive play book of--how shall I say this politely?--one play, the Governor proposes tax hikes.  And this is from a Governor who sold the electorate on his vast political experience.

First, some background information.  California already has the nation's second-highest marginal tax rate of 10.3%, second only to Hawaii, at 11%.  Even California's 2nd top income tax rate is the nation's 4th highest, after Hawaii, California's top bracket, and Oregon.  California's 2nd top bracket starts at $48,000 in income for single taxpayers.

To fix the multi-billion dollar shortfall, Governor Brown proposes creating new state tax brackets and to increase taxes on those brackets by up to 21.5%.  The Governor's proposal would add the following new brackets.  The dollar brackets shown are for single tax filers; brackets for married filing jointly are doubled.
  • Tax rates for those making less than $250,000 remain the same.  California would keep it's current 9.3% rate for those making more than $47,000.
  • Income between $250,000 and $300,000 are taxed at 10.3%, which is the same rate currently charged for those making more than $1,000,000.
  • Income between $300,000 and $500,000 are taxed at 10.8%.
  • Income between $500,000 and $1,000,000 are taxed at 11.3%, which exceeds the highest marginal tax rate from any other state in the nation.
  • Thanks to California's Proposition 63, those earning more than $1,000,000 are charged an extra 1% to fund mental health services--proving I guess that you must be INSANE to be a millionaire and have your tax residence in California.
  • Unlike the federal government and many of its economic competitors, California treats capital gains exactly like ordinary income and taxes capital gains at the maximum applicable tax rate.  This means that California's budget greatly depends on stock market and real-estate returns on upper-income taxpayers.  The result is a watershed of revenue in good times and a drought during downturns.

The following chart helps to better compare the increased tax rates against those of other states.  (NOTE:  Oregon dropped their top rate from 11% to 9.9%)

The Governor purposely did not increase tax rates on lower incomes, perhaps in a nod to tax fairness.  After all, those making more than $300,000 only currently pay more than eight times more total tax and have an eight times higher average effective tax rate than the vast majority of other Californians.  The only thing lacking from the 1.9% of taxpayers is the votes at the ballot box to prevent more exploitation by the majority.

Those in upper brackets not only pay a higher effective tax rate, they also obvious pay far more in absolute dollars.  Those fortunate 42,517 taxpayers with incomes of $1 million or more paid an average of $304,553 in California income taxes with an effective tax rate of 8.97%.

In all fairness, all taxpayers, especially those at the lower-end of the income spectrum, will be hit by Governor Brown's proposed sales tax increase.  California ALREADY has the nation's highest sales tax rate.  Governor Brown will enshrine our first place finish by adding another 0.5% on top, not including the additional taxes charged by various California counties and cities.  This amounts to a 6% increase over current tax law.

Governor Brown's tax increase proposal will likely be popular with the two biggest spenders in California politics, the California Teachers Association (CTA) and the California State Council of Service Employees (SEIU).  Both are significant donors to the Governor's political party.  Furthermore, even fellow Democrats acknowledge that Governor Brown must kowtow to the teacher's union.

The bulk of any tax revenues is earmarked for education, which is already one of the biggest recipients of taxpayer dollars.

The big questions remain.  How will these proposed tax increases affect California's already damaged business climate--you know, the source for all that tax revenue.  California currently ranks at or near the bottom of various surveys, from multiple independent sources, for multiple years.

California's poor business climate and high taxation resulted in a net migration out of California.  According to the L.A. Times, the percentage of people from other U.S. states is the lowest it has been in a hundred years!  Because California's tax revenues are so dependent on very few, high-income taxpayers, small changes in taxpayer population can have dramatic effects on tax revenues.  Over 50% of income taxes come from less than 2% of the population.

Political columnist Dan Walters has a great summary message for those that oppose the tax increases.
Why should we pay more ...
  • when we already have one of the nation's highest tax burdens,
  • when the Legislature is handing out raises to its staff,
  • when politicians haven't curbed rapidly increasing pension costs,
  • when they're wasting billions on prisons, 
  • when they've shunned a spending limit,
  • when they've squandered money on a hapless bullet train project and unworkable computer systems, 
  • when they're spending tens of millions on illegal immigrants' college educations, and 
  • most importantly – when the state is mired in recession and 2 million-plus are jobless?
Well said, Mr. Walters!

Who's bankrolling the initiative?

Brown, Teachers, Business And Public Safety, Californians To Protect Schools, Universities And Public Safety, A Ballot Measure Committee Supported by Governor Jerry

(as of 13-FEB-2012)

See also ...


  1. All taxes have a purpose all 2013 tax bracketsgo to some government funded program or project of some sort. It does not matter if we see the projects or not the money is going there. When you drive to work the same way you do every day and you don't hit that pothole you swear at two or three times a week did you notice it was filled in.

  2. Hozempa Charlena, this article is specifically about California Governor Jerry Brown's tax hikes, known as Proposition 30. See the updated post here.

    Thanks to Proposition 30, Californians now "enjoy" the nation's highest state sales tax rate and the nation's 1st-, 2nd-, 3rd-, 5th-, and 7th-highest state marginal income tax rates.

    Despite our high taxes, high spending, and high debt, we have ...

    * public schools ranked near the bottom nationally in math, reading, and science

    * a state government that was ranked the nation's worst-run for two consecutive years

    As the late, great Will Rogers once said, "The crime of taxation is not in the taking it, it's in the way that it's spent."