TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Monday, January 23, 2012

California, Other States Consider Tax Hikes on 'Millionaires'

Governor Jerry Brown insisted in his State of the State speech last week that California is "still the land of dreams." He's certainly right if he's referring to his latest fantasy that raising taxes on the upper middle-class will generate an additional $5 billion annually over the next five years, eliminate the state's chronic budget deficits and pay down a large portion of its debt. Fortunately, the state's Legislative Analyst's Office, of all unlikely Sacramento institutions, has checked in from realityville.

In a new report, the office warns that the initiative that Mr. Brown wants to put on the November ballot to raise taxes on top earners might not generate as much revenue as he projects because their income is extremely volatile. Mr. Brown wants to increase the rates on individuals making between $250,000 and $300,000 to 10.3% from 9.3% and to 10.8% for those earning up to $500,000. The "millionaires" earning more than $500,000 would pay 11.3%.

The top 1% of earners already pay about 40% of the state's income taxes, a large chunk of which is on capital gains that are taxed at the same rate as wages. In the past, changes in the economy and stock prices have caused huge fluctuations in capital gains income and tax revenue. ...

Mr. Brown's plan has little to do with economic reality. It's all about the politics of dreams, pretending that higher rates will produce more revenue in order to spend more, and hoping the economy booms again to bail him out. The Governor is also betting that his proposal to trigger $5 billion of education spending cuts if the tax hikes don't pass will scare the 99% enough to sock it to the 1%. If voters fall for it, they'll get the economy and deficits they deserve.

We are concerned that the administration's current method of forecasting high–income filers' income—especially capital gains—tends to overestimate state revenue growth from the PIT over the next few years, including revenue growth that would result from the Governor's tax initiative. Figure 7 shows historical net capital gains of California resident tax filers, as well as both our office's November 2011 estimates and DOF's current estimates. ...


On Wednesday, Mr. Brown briefly talked up his tax measure, which calls for increasing income taxes for people making $250,000 and up by as much as two percentage points from 2012 through 2017, and boosting the sales tax of 7.25% by half a percentage point from 2013 through 2017.

Mr. Brown described as "fair" a combination of tax increases and cuts in his proposed budget for the fiscal year ending in June 2013. The administration expects the tax changes to generate $6.9 billion by the end of the 2013 fiscal year to help close a budget gap of $9.2 billion.


Across the country in New Jersey, Gov. Chris Christie took shots at Brown’s tax hike proposal while pushing for a cut in his state’s income tax.

“California’s governor has proposed to raise the top rate, already among the highest in the nation, by up to two percentage points,” said Christie, a Republican. He added, “In this environment, the best way to compete is to show a different direction. Let others choose tax increases. We choose responsible tax cuts to give our overburdened citizens real relief.”

This week, a pair of governors called for something that just two years ago might have been politically untenable: permanent targeted state tax increases on the rich.

First, Maryland Gov. Martin O'Malley called on the state legislature Tuesday to approve a tax hike on individuals earning $100,000 or more and couples taking in above $150,000.

Then on Wednesday, California Gov. Jerry Brown said his administration will attempt to place on the ballot a measure that could raise income taxes on those earning more than $250,000.

The governors' proposals are still far from becoming state tax policy. But their pitches might mark a turn toward strategies to shore up state budgets by imposing new taxes rather than the drastic cuts or temporary surcharges on the well-to-do that were commonplace during the recession, state finance experts say.

"It's early, but there does seem to be a bit of an uptick in governors proposing tax increases on the rich," said Jon Schure, director of state fiscal strategies at the Center on Budget and Policy Priorities, a Washington think tank. "The public is more receptive to that idea now. They have seen a few years of what cuts look like. They know what college costs after budget cuts are made. They know that there are certain days of the week you can’t go to the library or ... how many kids are in their child's class at school. And they don’t like it."

As the "tax the rich" debate rages in Washington D.C., some states are turning to their wealthiest residents to bring in much-needed revenue. The governors of the two largest Democratic states want rich folks to help close budget gaps. And Democratic lawmakers elsewhere are preparing to do battle with Republican leaders to blunt budget cuts by instituting a millionaire tax. This marks a shift from last year, when state leaders largely shied away from raising taxes in general. Several cash-strapped states, including Maryland, New Jersey and Oregon, let their millionaire taxes lapse.

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