California has the highest sales tax rate, the highest gas tax rate, the highest overall income tax burden in the nation, and the highest corporate tax rate. The Tax Foundation ranks California’s business climate as 47th in the nation.
The assertion that the rich do not “pay their fair share” is simplistic, sounds good and satisfies some innate desire to punish anyone who would dare to be successful or what we might perceive to be wealthy; but the slogan is patently untrue.
The Democrats’ effort to increase income taxes on the wealthiest California residents to 12% will be the highest income tax rate in the nation – twice the national average. By comparison, Vermont’s 9.3 percent income tax rate is second highest in the nation; however, it does not apply until income reaches $357,700 in income.
California’s new tax rate will apply to a married couple making more than $89,630 a year. This theoretical couple’s state income tax for 2007 was $8336. If approved, the state’s new tax rate will cost them $10,700 a year, reducing their net income by more than $200 a month and their annual combined income to $78,900. These figured don’t include federal income tax, sales tax, property tax, gas taxes, utility taxes, etc. I guess that’s the price you pay for being “rich” and living in California.
By contrast, in 2007 a married couple with two children making $49,083 a year paid no income tax. A single mother with one child could earn $39,283 without paying a dime. And those on the upper end of the pay scale are not the ones using state health and social services programs, but they are paying generously for them.
Those with incomes of more than $100,000 already pay 83% of the state’s income taxes, and the richest 6,000 California residents contribute $9 billion in tax revenue. And the wealthy are those who can most readily protect their assets by moving out of state. Economists understand that reasonable tax rates can actually generate more revenue because more people are willing to pay them. Punitive tax rates encourage avoidance behaviors, including leaving the state. Tiger Woods is only one obvious example.
Let’s look at the merits of the “yacht tax.” It used to be that someone purchasing a yacht would have to pay sales tax on the vessel if they brought it into the state within the first three months of purchase. So California yacht owners might typically purchase their yacht in Oregon, Washington, or Mexico, moor it out of state for three months and then bring it into California. Such avoidance behavior annoys those who are generally irritated that any would have the audacity to purchase a yacht in the first place, and then even more audacity to avoid paying sales tax on the dang thing before bringing it into the state. So, the thinkers in the Legislature decided to increase the taxation window to 12 months, since surely the yacht owners would rather pay the tax than wait to bring their purchase into California waters. Good idea? Not really.
Those who can afford to will certainly consider the value of patience, if necessary, to avoid excessive taxation. What the “so-be-it” folks fail to take into account is that avoidance takes with it a whole host of economic opportunity and real jobs. Across-the-border demand for after-market purchases, equipment suppliers, outfitters, storage facilities, maintenance, repair and marinas will increase, particularly over the course of the first year of possession of any vehicle or vessel. Many of the jobs and a portion of the economic value that accompanies those services will simply be exported.
It is wise to question whether the minor benefit of added revenue of the few consumers who choose not to wait the full year to bring their property into California outweighs the potential losses in other segments of the economy. And, in truth, if the state reduced its luxury tax to a reasonable level, it might actually generate more jobs and more revenue for the state. That’s the beauty of economics that many simple-minded people struggle to grasp. Or they are so bent on taxing (or simply inconveniencing) rich folks, that they are willing to forfeit the greater good of the state in unwavering defense of the principle.
Conversely, since the state cannot stop businesses from outside jurisdictions from tempting California citizens to purchase their products elsewhere to avoid taxation, it might be beneficial to reduce the existing disincentives we have created which motivate consumers to make purchases elsewhere. Because of the after-market benefits which support the state’s economy, it makes more economic sense to me to return to the 90-day exemption rather than continuing the extension to a full year.
Catchy little phrases like, “tax the rich,” may tickle the ears, but the wise application of sound economic principles requires a broader scope of thought and consideration of policies’ long-term effects. It is important to ask: Who qualifies as “rich?” How much do they contribute? And, do we really want to give the wealthy and the job-creators another incentive to leave California?
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