Good News California You’re #1 Again, In Taxes

From The Sacramento Bee:

Thanks to passage of Proposition 30 last month, high-income Californians would pay the nation’s highest marginal income tax rates — nearly 52 percent — if President Barack Obama and Congress fail to make a deal to avoid the so-called “fiscal cliff,” according to a new study.

Without a fiscal cliff deal to the contrary, the Bush era tax cuts on high-income taxpayers would expire next year and rates would return to their previous levels.

Gerald Prante, an economics professor at Lynchburg College in Virginia, and Austin John, a Lynchburg economics student, calculated marginal tax rates — the highest rates on the highest levels of income — for all 50 states. They combined state, federal and, where applicable, local income taxes, plus payroll taxes for Social Security and Medicare and included the deductibility of some taxes.

Proposition 30 added three percentage points to the marginal state income tax rate for California’s highest-income taxpayers, bringing it to 13.3 percent. That action raised California over other high-tax jurisdictions to a marginal rate of 51.9 percent, slightly higher than New York City’s level. Hawaii was the only other place with a calculated rate above 50 percent.

All Things Digital notes that the retroactive rate increases are intended to capitalize on the Facebook IPO, but with all marginal rates (including capital gains) now over 50% they’ve just created a real powerful disincentive for start-up firms to locate in the struggling state.

Nothing terrifies investors or entrepreneurs as much as the concept of expropriation. When governments decide to expropriate legally obtained assets, entrepreneurs who worked tirelessly to build businesses and investors who risked scarce capital end up with little to nothing for their troubles. In fact, developing countries often get saddled with country risk premiums, making it harder for them to attract capital because the mere threat their governments will someday seize profitable companies or industries keeps investors away.

So it’s all the more puzzling that California, home of Silicon Valley and the densest concentration of entrepreneurs in the nation (possibly the world) would pass Proposition 30 in last month’s election. Regardless of your personal views on the issues of taxing and spending, there is one thing that cannot be overlooked. Prop 30 includes a gigantic retroactive tax increase on legitimate capital gains and ordinary income that dates back to Jan. 1, 2012.

The top marginal rate jumps by 29.13 percent to a staggering 13.3 percent of income. Oddly, California doesn’t distinguish between ordinary income and capital gains in the way the federal government does. The result is that we have nearly doubled the 15 percent federal capital gains tax rate, and this applies to income earned in the past, for which taxes have already been paid.

By enacting their “millionaire” tax (really a clone of the Obama $250,000 and above plan) California has gambled that the won’t chase away all of those likely to pay the tax. Good luck with that…

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