California Hopes to Tax Its way Out of Austerity

My union, the California Federation of Teachers (CFT), heads a coalition that proposes taxing millionaires to raise an estimated $6 billion annually. The article Act now to put Millionaires Tax on the November Ballot (California Teacher, Nov-Dec 2011, V.65, No.2) describes how the proposed "ballot measure will tax individuals earning $1 million per year an additional 3 percent and those earning $2 million or more per year an additional 5 percent." Three competing measures to raise taxes are also on the ballot but this is the one that focuses on taxing only the rich, and, as of February, 2012, is the most popular. "Under the CFT measure, the typical (italics mine) California taxpayer will have no increase in income taxes."

In late December, 2011 I sent an email to CFT President Josh Pechthalt, asking him to show me the numbers. Do we have enough millionaires in California to raise an additional $6 billion? I received no reply.

Assuming the CFT's math is correct, what is the likelihood the new tax will raise $6 billion, solving most of California's budget problems? Let's take a look at the history of other states that have tried the same thing.

Maryland reported only a slightly lower level of millionaires filing after they adopted their tax. The controversy over whether taxing millionaires drives them out is updated here.

Stanford professor Cristobal Young examined New Jersey tax revenue, finding that most of the wealthy don't leave when taxes on them are raised. However, he also said the millionaire tax make state budgets more sensitive to the business cycle.

This is particularly true in a state like California that tends to have deeper recessions than the rest of the country. States should either bank a significant portion of their millionaire tax revenues, or tie the millionaire tax to the unemployment rate. So, when the unemployment rate rises above average, the millionaire tax is triggered, and when unemployment falls below average, the millionaire tax turns off. This would do a lot to help stabilize state budgets.

Since politicians, not academics run the state, it is quite unlikely that California would bank a portion of their millionaire tax revenues or turn off the tax during boom times.  Instead, the State bureaucrats will  keep the tax permanent, raising it even more during recessions. This cycle can't continue forever. Eventually the wealthy really will leave--less millionaires will stick around to be taxed.

Updated, February 25, 2012 and July 8, 2012