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Does California’s government have a clue what it is doing?

I’ve written before about how policymakers will apply the logic that taxes act as a disincentive to what is being taxed in some cases, but not in others. They tax cigarettes so you will smoke less. But they assume that if they tax labor you will just go on working exactly as you did before.

But nowhere is the muddled thinking on the effects of taxation more clear than in California, under the disastrous leadership of Gov. Jerry Brown.

Oh no, the rich might leave if they have to pay more tax!

Like Minnesota, California is a high tax state. Like Minnesota, it passes some of the burden of those high tax rates on to residents of other states via the State and Local Tax deduction. And, like Minnesota, now that the deduction’s reduction means that more of these states’ tax burden will fall on their residents, California’s policymakers are panicking about the consequences.

As the Sacramento Bee explains in an article titled ‘Wealthy exodus to escape new tax rules worries California Democrats‘,

The Republican-backed federal tax bill flipped the tables on a never-ending question for California politicians: Will high taxes lead the state’s wealthiest residents to flee the Golden State for the comparable tax havens of Florida, Nevada and Texas?

Republicans reliably raise that alarm when Democrats advocate for tax increases, like the 2012 and 2016 ballot initiatives that levied a new income tax on very high-earning residents.

But now, with the federal tax bill cutting off deductions that benefited well-off Californians, the state’s Democrats suddenly are singing the GOP song about a potential millionaire exodus.

“People with higher incomes pay a lot more money, and some of them may be tempted to leave,” Gov. Jerry Brown said when he unveiled his 2018-19 budget proposal last week. “This was an assault by the Republicans in Congress against California.”

People in high tax states have an incentive to move to lower tax ones. And there is evidence that Minnesotans do just this. Makes sense. Even Gov. Brown gets it.

Don’t worry, companies won’t leave if they have to pay more tax

But California’s policymakers disregard this logic when it comes to companies. Again from the Sacramento Bee, in a story titled ‘‘Time for middle class tax justice’: California corporate tax bill offsets Trump cuts‘,

A pair of California lawmakers want to claw back some of steep tax cuts that corporations will receive under the federal tax overhaul signed last month by President Donald Trump.

Democratic Assemblymen Kevin McCarty of Sacramento and Phil Ting of San Francisco announced Thursday that they will pursue a constitutional amendment to add a surcharge on large companies that do business in California, potentially raising billions of dollars to expand social services for Californians.

The proposal from McCarty and Ting creates a new tax for businesses in California, which already has a state corporate tax rate of 8.84 percent. Companies with annual net income of more than $1 million in California would pay an additional surcharge of 7 percent, or half their savings from the recent federal tax cut.

So individuals with high tax rates will move to low tax ones. But companies with high tax rates will, apparently, just shovel over their cash to the government.

They won’t. The bill’s supporters think that it will generate $15 billion to $17 billion a year “which would be directed toward funding for education, college affordability initiatives, child care and preschool slots, taxpayer rebates and an expansion of California’s Earned Income Tax Credit”. In fact, it will cost the state lost tax revenue. Indeed, these programs will end up more cash strapped than they are right now.

Both of these issues – the SALT deduction and high corporate taxes – exist in Minnesota. We must hope that our policymakers deal with them more sensibly than California’s.

John Phelan is an economist at Center of the American Experiment. 




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