California Income Tax Rate Proposition 30

Bob Brinker's comments on California Taxes and Tax Rates.

Moneytalk with Bob Brinker Commentary for October 28, 2012 Radio Show

Brinker Comment: Bob opened the broadcast discussing the new figures on gross domestic product. Bob said his projection has been for a slow-growth economy as defined by a slow rate of growth in real GDP (adjusted for inflation) and we continue to see that with the number for the third quarter coming in at 2.0%. When you couple that number with the first half of the year, you are looking at an annual rate of growth of 1.8% for the first 9 months which is the type of slow growth that Bob thinks we will see for the remainder of the year. 

The following commentary is from my "Retirement Advisor" writing partner,  David Korn. 

CALIFORNIA INCOME TAX

Caller: This caller is seeing businesses pulling out of California in droves. 

Bob said one of the reasons you are seeing that is Jerry Brown’s proposition 30. You already have a 10.5% maximum state income tax rate in California. Jerry Brown wants to raise it and if you make over $1 million the income tax rate will go up to 13%. 

If you take the federal income rate for the highest earners it is supposed to go to 39.6% in January.  When you add the 13% California state tax, the uncapped Medicare tax to 3.8% all of a sudden you are in the 60% tax rate for top earners in California if the Proposition passes. 

The caller said it is 64%. Bob said when a tax rate gets that high, and you are taking most of the money someone makes and people will say that’s too much, I am out of here. Bob noted that in France they just passed a new top rate of 75% and there are a lot of one-way tickets leaving France by the well-to-do. You can run the rates as much as you want and as high as you want, but people will run away and leave.

EC (David Korn): : An article out this weekend entitled, “Would Prop. 30 really drive millionaires out of California” can be found at this url: http://tinyurl.com/8b3rxza

It's refreshing, therefore, to see some hard data on the issue, and illuminating to learn what it tells us, which is: Not so.

The 2005 increase did not boost out-migration among the $1-million-plus population — in fact, the rate of millionaire out-migration declined after the hike. The 1996 tax cut didn't increase the flow of millionaires into California, either.  

Kirk's Comment:  Bob has it wrong.  The really rich stay after giving themselves pay raises to make up for higher taxes. 

The truth is the rich stay but they move jobs for those who work for them out of CA so they can lower their overall costs and make up for the higher taxes.  They save a ton by not having to pay extra for workers to move to CA where costs and taxes are very high.  A worker making $100,000 in Texas might need to make $150,000 to move to CA to afford a mortgage on a much more expensive home and offset the higher taxes.    Jobs have been leaving California since the 1970s!  

When I graduated from UC Berkeley in 1979 with a degree in Electrical Engineering and Computer Science, I went to work in the Silicon Valley designing semiconductors for communications, what was to become the internet.  I actually started as a summer intern in 1978.  What struck me then was  HP was ALREADY starting to move jobs out of California to lower cost states and countries.  California has a business property tax which I believe drove out most of the semiconductor industry.  The managers stay in CA since they can just give themselves a bigger raise to pay to live here. 

Back in 1978, Intel, HP, and many other companies built semiconductors in the Silicon Valley.  Today almost all the plants are gone.  New plants cost about $5 billion to build. Why would anyone sane build a $5B plant in a state that charges 1% a year tax on that plant?  Other states and countries like Singapore gave HP and Intel "tax holidays" to build new plants so they would have highly paid workers whom they could tax.  Also, the workers would spend their paychecks near the new factories making new jobs.

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The above commentary is courtesy of my writing partner, David Korn: 

David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials, and Special Alert E-Mail Service.  Copyright David Korn, L.L.C. 2012

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