Aggressive new California tax hike proposal could accelerate exodus from state

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A for sale sign is posted on a home in Monterey Park, Calif. Thursday, Sept. 11, 2014. The number of California homes sold in August fell to the lowest level in four years as a supply crunch pushed prices higher and kept homes out of reach for many buyers. The real estate research firm CoreLogic DataQuick reported Thursday that around 37,000 houses and condos were sold. (AP Photo/ Nick Ut ) Nick Ut

Aggressive new California tax hike proposal could accelerate exodus from state

January 13, 06:30 AM January 13, 07:56 AM

A new healthcare proposal that would nearly double California’s tax revenue has the potential to push more people out of the state.

The ambitious legislative proposal would create a single-payer healthcare system and use the increased taxes to fund it. While the legislation faces an uphill battle, Gov. Gavin Newsom has publicly voiced support for single-payer systems in the past. He has yet to weigh in on the new legislation.

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Jared Walczak, vice president of state projects at the Tax Foundation, told the Washington Examiner that if passed, the legislation would amount to a $163 billion per year tax increase that would effectively double state collections. That increased revenue comes with a cost, though, one borne by taxpayers that could push residents to lower-tax states.

“You would expect to see a substantial exodus of businesses and middle- and high-income earners,” Walczak said of California if the tax-and-spend proposal were to become law.

PEOPLE FLEEING HIGH-TAX STATES TO LOWER-TAX STATES DURING THE PANDEMIC

Kyle Pomerleau, a senior fellow at the conservative American Enterprise Institute, explained that the proposal includes three main revenue raisers: an increase to income taxes for high-income individuals, a payroll tax on workers’ wages for companies of a certain size, and a gross receipts tax.

Under the new proposal, the top marginal income tax rate would sit at a whopping 18.05%, a number that is much more than the 12.3% rate that those at the top of the bracket are paying now to live and work in the Golden State.

The payroll tax plan applies to employees with more than $49,990 in annual income and could be seen as creating a tax cliff because it only applies to companies with more than 50 workers. Companies might try to avoid hiring more employees to avoid having the tax imposed, which could disincentivize businesses from expanding.

Perhaps the most controversial element of the proposal is the gross receipts tax. Walczak pointed out that Ohio introduced a gross receipts tax after it repealed its corporate income tax and other streams of revenue. The Ohio receipts tax is only 0.26%, and California’s tax would be much more aggressive at 2.3%.

“If we think about the fact that grocery stores typically have margins lower than 2%, if they didn’t change their prices, this tax would be more than the entire profit of a typical grocery store,” Walczak said, adding that the tax would increase existing inflationary pressure on goods. “It would literally be impossible to pay this tax out of profits based on current prices.”

The tax would have a disproportionate effect on businesses depending on the industry. For example, many tech companies in the Golden State have very high profit margins and might not have too much trouble paying for the new levy. On the other hand, businesses with very low profit margins, such as grocery and retail clothing stores, would have to alter their businesses in order to cover the new tax.

“It penalizes certain industries more than others. It’s unfair in that respect,” Pomerleau told the Washington Examiner.

California has already been dealing with a population drain.

The Tax Foundation used data from the census and commercial datasets from U-Haul and United Van Lines to compile a list of which states had the biggest population inflows and outflows. Many of the states people are leaving have higher taxes than states where people have been relocating.

California’s population declined by 0.8% last year, while lower-tax states such as Florida and Texas saw 1.1% and 1.3% increases, respectively.

But how much of the population decrease from California is a result of higher taxes, and how much would the new proposal increase that migration? Pomerleau said that it’s a difficult question to answer given the myriad variables at play.

“All things equal, people would want to locate in areas in which their after-tax income would be maximized,” Pomerleau said. “So if they could do the same exact job and live in a place that was just as nice but they could earn more money after taxes … they pick the place with the lower tax burden.”

Despite that, oftentimes, things are not equal, and other policies and geographical considerations come into play in determining which areas are attractive for people to live in. Remote work facilitated by the response to the pandemic has opened up new opportunities for relocation.

For example, while those in the tech sector are traditionally based out of the West Coast, remote work has allowed them to move elsewhere but keep their jobs. Pomerleau said that while how much someone makes could influence their decision to relocate because the income tax proposal is “highly progressive,” the other taxes involved have the potential to ding lower-wage workers.

Still, Pomerleau said that how much workers value the single-payer healthcare system that is created from the increased tax revenue would also be a factor in whether they wish to remain residents of California or move elsewhere. Under the single-payer regime, dubbed CalCare, residents would not have to pay premiums, copays, deductibles, or other out-of-pocket costs, proponents say. Those savings could be worth the higher tax burden for some. Californians now pay an average of $6,444 annually for their health insurance premiums, according to LendingTree.

While some might move simply because of the tax burden, others might relocate because of tax-adjacent reasons. For example, if the high-tax proposal passes, some businesses could make the decision to move to states with lower taxes and bring jobs, and thus people, from California with them.

“Migration out of states like California and New York has been persistent. Every year, we see an out-migration from these states and high levels of in-migration to some of the lowest-taxed states,” Walczak said. He made the point that these are long-term trends, as a sizable number of people temporarily relocated to different states during the pandemic because of the ability to work remotely.

But does this legislation have a chance of becoming law?

The dramatic change is likely to face an uphill battle given that it would require a constitutional amendment (and thus a supermajority of the Legislature), as well as the support of voters, as it would end up on the ballot. While Democrats control both chambers and the single-payer legislation already made it through committee, some of the more centrist members may not throw their weight behind such a drastic change to the state’s tax code.

Business groups such as the California Chamber of Commerce are already fighting against the changes and will lobby the public to vote down the tax changes should the proposal make it to ballot boxes. The chamber has said that even with the tax hikes, the CalCare system would still be too costly.

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“Completely abolishing the current system in face of unrelenting pandemic by annually taxing Californians hundreds of billions of dollars is not the solution,” said Preston Young, a policy advocate for the California Chamber of Commerce.

Notably, Newsom, the Democratic governor, has not endorsed the single-payer plan and has said he has not yet had the opportunity to review the proposal.

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