SACRAMENTO -- — California has long had a reputation for soaking the rich, claiming a particularly large slice of their earnings to feed its growing government. Now, legislative Democrats want to push it further.
Their plan to balance the state budget would raise the wealthiest Californians' income taxes -- already the highest in the nation -- to a level not seen anywhere in the country in years. After years of income taxes steadily dropping elsewhere, California would raise the effective rate on those earning at least $1 million to 12%, more than twice the rate in most other states that have income taxes.
Although legislative leaders are weighing a plan to balance the budget in part by raiding transportation funds and local government accounts, many Democrats are still rallying around an income-tax increase as the best way to bring the budget into balance over the long term.
Economists and money managers, though, are wondering whether California would be returning to this well one time too many. There is, they say, a point at which the cash infusion is outweighed by damage done to the economy: Entrepreneurs get driven away. Profits get stowed in tax shelters. Companies shelve plans for expansion.
"The more a tax sticks out like a sore thumb, the more taxpayers will look for ways to avoid it," said Robert Ward, deputy director of the Nelson A. Rockefeller Institute of Government in Albany, N.Y. California's income tax on its highest earners "would be a significantly higher rate than in any other state." Rhode Island's is the next highest, at 9.9%.
Robert Brown is well aware of that. The 72-year-old small-business owner from Thousand Oaks isn't a million-dollar earner, but his income is in the high six figures, and the state tax on it would jump from 9.3% to 11% under the Democratic plan. He's considering bolting.
"These people have no concept that when you raise taxes, you drive people away," he said. "Quite a number of my good friends have moved -- to New Mexico, to Arizona, to North Carolina. We are thinking about doing the same."
Proponents of tax hikes, though, say there is no evidence that meaningful numbers of high earners follow through on threats to leave. The number of wealthy Californians continued to swell after the last tax hike targeted at the rich, a 1% surcharge on income above $1 million that was approved by voters in 2004, according to the California Budget Project, a think tank that advocates for low-income Californians. And a study by the Public Policy Institute of California concluded that the state's job growth typically keeps pace with the national average.
