Jan. 11 (Bloomberg) -- California Governor Jerry Brown’s plan to balance the state budget in part with higher taxes on the wealthy depends on a group of top earners that shrank by one-third from 2007 to 2009.
Tax returns with adjusted gross incomes topping $500,000 fell to 98,610 in 2009, the latest year available, from a recent peak of 146,221 two years earlier, according to data from the Franchise Tax Board, the state agency that collects income and corporate taxes.
Brown, a 73-year-old Democrat, faces a budget deficit of $9.2 billion. If voters reject his tax plan, Brown proposes to cut $4.8 billion from schools, the equivalent of taking three weeks from the academic year. California’s top individual tax rate of 10.3 percent is third-highest in the U.S., behind Hawaii and Oregon, according to the Washington-based Tax Foundation. The new tax proposal might put California on top.
“Some of them welcome it with open arms,” Brown said when asked last month what high-income individuals were saying about the increase. “I’m sure if you made more than a million dollars a year, you’d be very happy to pay 2 percent on whatever else you made.”
California’s share of top-earners has dwindled even as their numbers climbed nationally, according to Internal Revenue Service data. The Golden State accounted for 14.7 percent of the 553,381 returns over $500,000 filed in 1999. Ten years later, the state’s share was 13.5 percent.
The decline may be tied to the nature of wealth creation, with technology and real estate being less profitable in recent years than other industries, according to Edward Leamer, director of the Anderson Forecast at the University of California, Los Angeles.
“My guess is it’s stock market gains from intellectual property created in California versus bonuses to Wall Street execs,” Leamer said.
California’s high taxes already prompt some top-earners to leave the state, according to Kevin McCarthy, a Republican congressman from Bakersfield.
“The more you chase away, the less you get,” he said in a Jan. 9 interview. “Why did Tiger Woods grow up here and not live here now?”
Brown has proposed a ballot measure that would increase rates for individuals making more than $250,000 a year to 10.3 percent from 9.3 percent and to 11.3 percent for single filers with income above $500,000.
Californians with earnings of more than $1 million are subject to a surcharge to fund mental health services that brings their present rate to 10.3 percent. Brown’s plan would push that to 12.3 percent. No other state has a higher rate, according to the Tax Foundation website.
The higher income taxes would be in effect for five years. Together with a statewide sales-tax increase to 7.75 percent from 7.25 percent, the increases may raise $6.9 billion through the next fiscal year, according to the governor’s office.
Such estimates are tricky because the income of California’s top-earners is highly volatile. Almost two-thirds comes from capital gains rather than wages, the state Legislative Analyst’s Office concluded in a Jan. 9 review of the governor’s tax proposal.
For the three-year period ending in 2013, the governor’s revenue estimates are $3.9 billion higher than the legislative analyst’s, according to a report released today. Of that difference, $3.7 billion is attributed to estimates of personal income taxes.
“The difficulty in knowing how much taxable income will be attributable to high-income Californians makes the state’s revenue estimates an even bigger question mark than usual,” the report said.
Generating most of the new revenue from high earners and linking the ballot measure to education funding may be the best chance Brown has of putting an increase by a tax-averse public, according to Dan Schnur, a former aide to Republican Governor Pete Wilson and now director of the Jesse M. Unruh Institute of Politics at the University of Southern California in Los Angeles.
“He’s saying pass this or we’ll cut three weeks out of the school year,” Schnur said. “That’s a pretty visceral measure. When Californians have voted to raise taxes in the past, they’ve always done it by raising taxes on other people.”
The nation’s most populous state, with 37.5 million residents, California’s population grew at its slowest rate in history in the past decade, according to U.S Census data. About 154,000 people left for other states in the fiscal year that ended July 1, continuing a trend that has seen 100,000 people a year leaving, according to the state’s Finance Department.
Three of the top five states to which Californians have moved over the past decade -- Nevada, Texas and Washington -- don’t tax wages, according to Aaron Renn, an analyst who runs a website called urbanophile.com.
“California is bleeding people like crazy to almost every state,” Renn said. “Every time they leave, they take income with them.”
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