California: more taxes anyone?

From Art Laffer writing at Investors.com:


...According to a new report from the Golden State's Franchise Tax Board, the top 1% of earners paid $25.7 billion in state income taxes in 2007. Two years later, the most recent for which data are available, that figure dropped by half — to $12.3 billion.

Researchers note that the economic downturn contributed to this drop. But that's not the only cause. A huge number of high-income taxpayers have simply left the state....

The average adjusted gross income for people leaving the state over that period was $44,700. Meanwhile, the average person moving into California posted income of just $38,600....

For many people, moving out of California is equivalent to getting a big raise — because their tax rates plummet. Of the top nine states Californians are flocking to, the average top personal income tax rate is 3.44%. California's is nearly triple that, at 10.3%.

Also, among those nine states, the corporate tax rate averages 4.59% vs. California's 8.84%. And their combined state and local tax burden is 9%, versus California's 11%.

But what about the people coming into California? Surely they must see some hidden benefit in the Golden State's economy.

The nine states losing the most taxpayers to California are New York, Illinois, New Jersey, Massachusetts, Michigan, Ohio, Pennsylvania, Connecticut, and Maryland. All of those states are economic basket cases. California is right with them in the league of losers — it just has better weather.

The mass migration of top earners has seriously damaged the Golden State's tax revenues. Ratcheting up rates might provide an influx of cash in the short term. But over time it will drive out payers and shrink the tax base.

Indeed, California lost a stunning $44 billion in tax revenue from the 869,000 taxpayers that left the state between 1992 and 2008. And that figure is probably too small. It only counts earnings for one year — the difference between paying state taxes one year and not paying them the next year, after the payer moved.

But someone who's left California hasn't deprived the state government of just one year of taxes — she's deprived it of revenue in future years as well. A tax filer that fled California in, say, 2008 didn't just take away tax revenue for 2009 — she also didn't pay taxes to California in 2010, 2011, 2012 and beyond.

Given this cumulative effect of foregone income taxes, this exodus of taxpayers may have actually cost California $500 billion between 1992 and 2008.

The "tax-first" strategy for balancing budgets and paying down debt has backfired in California. If federal lawmakers insist on adopting that strategy, it will backfire on the national level, too. Top earners will flee to other countries, leaving the United States with lower tax revenues, a smaller tax base, even more debt and a stagnant economy.

• Laffer is chairman of Laffer Associates and author of the new book "Eureka! How to Fix California."

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Link: http://news.investors.com/article/607901/201204161652/california-blazes-wrong-trail-on-tax-hikes-for-rich.htm