California Speeds Up Its Drain-Circling

I suppose that congratulations are in order to California, which passed Governor Brown's income tax increase measure by 54-46.  Proposition 30 will increase top marginal state income tax rates from 9.3% to 10.3% on income above $250,000, 11.3% on income above $600,000, and 12.3% on income above $1 million.  The increases are retroactive to the beginning of 2012 and will be in effect through 2018.  The measure also includes a sales tax increase.

Dan Mitchell says "I feel safe in stating that this measure is going to accelerate California's economic decline."  Agreed.

Changes in behavior resulting from extra taxes often happen slowly and can be somewhat hard to spot, but let me mention a couple of examples:

(1) In 1975 when I moved to New York, New York State's marginal income tax rate was 14%; New York City had an additional tax with a top rate of about 4%.  No state has anything close to that 18% combined rate today.  Those top marginal rates kicked in at very low income -- if recollection serves, I was paying the top state rate within my first year as a law firm associate, earning just over $20,000 per year.  At the time, New Jersey and Connecticut had no state income taxes whatsoever.  What happened?  This is the era when Greenwich Village was seedy, a new major corporation announced it was leaving New York every month or so, and the Bronx was burning.  Despite the high tax rates, the City defaulted on its debt.  New York City's population dropped by over 800,000 from 1970 to 1980.  Meanwhile, the New Jersey waterfront right across from us took off with one new tower after another, while the seemingly equally desirable Brooklyn waterfront across from the other side of Manhattan had not a single new building go up for decades.  And downtown Stamford, CT (about 35 miles away) also boomed with one new office building after another.

In the intervening time, what?  Starting in the late 70s New York State (first under Gov. Hugh Carey, but also under his successors Cuomo and Pataki) lowered the top state marginal rate in many steps until it got below7%. New Jersey adopted its first state income tax in the late 70s(after which then-Gov. Jim Florio was immediately ousted from office), and has continued to increase its top rate

until it is now 8.97%. Connecticut introduced its first income tax in the early 90s, and has increased it since until the top rate is now 6.87%.

The combined New York State/City top rate (State recently went back up to about 9% on a "temporary" basis) is still somewhat higher than either New Jersey or Connecticut, but instead of the ridiculous 18% to zero, we are now within striking range of competitiveness.  Results:  today Brooklyn is hot and Jersey City is ice cold.  The Bronx is no longer burning, Greenwich Village is fancy, and even the Lower East Side is gentrifying.  The Manhattan business community resumed growing in the 80s, and today new businesses have replaced the corporate headquarters that fled in the 70s.  Within the last year a major corporation (UBS) that had left Manhattan for Stamford years ago announced that it was planning to return.  (As of now, Connecticut has apparently retained them by offering some big-time "incentives" aka bribes.)

OK, there are other factors that went into this.  Public safety was certainly one.  Another was that, as bad as is the management of the New York State and City governments,New Jersey and Connecticut are clearly worse.  But there is no doubt that the 18% income tax rate differential was killing New York City.

(2)One other brief example.  I once was given a tour of Philadelphia that took us to City Line Avenue on the city's west border.  The side outside the city limits was lined with new office buildings.  The other side of the street consisted of decrepit buildings and vacant lots. 

The interesting question will be, how much of the projected increase in revenues will California actually achieve?  Good luck California!