California is no stranger to finding new and ingenious ways to convince its residents that they should get out while they still can. And while it just managed to avoid a health care plan that could send more to the exits, residents should take note of what kinds of tax increases very nearly became law.
Proposed legislation to institute a single-payer health care system was pulled from consideration at the last second when it became clear that it lacked the legislative support to pass. But given that it would have entailed nearly doubling the tax burden that Californians already face, it’s astonishing that it got as far as it did.
In order to fund a single-payer health care system in the state, the bill would have increased taxes through three mechanisms, estimated to raise a total of $163 billion. These tax hikes included a new 2.3% gross receipts tax on businesses, a 1.25% payroll taxes on businesses (with a higher rate for wages paid to employees making $50,000 or more), and 0.5 to 2.5% increases to the individual income tax rate. In total, this would have basically doubled the state’s already high taxes, putting them in their own league with New York a distant second.
Tax increases are always an economic burden, but the bill’s authors still managed to find ways to make them even more harmful than normal. A gross receipts tax, for example, is one of the worst ways to raise revenue, as it disproportionately affects businesses with low profit margins. Gross receipts taxes are assessed as a percentage of revenue, not profit, so a business making a profit margin below 2.3% would actually be losing money by continuing to do business in California. This rate would be nearly ten times as much as the current highest gross receipts tax in the nation, Ohio’s 0.26% levy.
The proposed payroll tax would be just as bad. Even if technically assessed on employers, employees would still bear the brunt of the tax’s economic incidence. What’s more, the fact that the surtax for payroll paid to employees making $50,000 kicks in at a level that is about two-thirds of the state’s median household income represents an added kick in the gut for average Californians.
And even if the taxes were better structured, the fact remains that California stubbornly refuses to learn its lesson that its residents are sick of having to pay the state’s ever-increasing taxes. IRS migration data continues to show that taxpayers are fleeing high-tax states for low-tax ones, creating a steady drain on high-tax states’ tax bases.
In 2019, for example, the latest year for which IRS migration data is available, a net of over 70,000 taxpayers fled California for greener pastures, reducing the state’s tax base by a net of $8.8 billion. It’s not only California suffering from this problem — nationwide, the clear trend is of taxpayers leaving high-tax states like California, New York and Illinois and heading to low-tax states like Florida, Texas and Arizona.
And that’s before the pandemic. As many businesses experimented with remote work situations during lockdowns, remote work has become more of a viable option. That’s led to businesses and employees being less tied to traditional “job hubs,” lessening a major advantage states like California and New York had in keeping workers from leaving. As factors like cost of living gain importance and prevalence of nearby job opportunities becomes less crucial, competitiveness of states’ tax codes will only become more important.
Of course, California has long had its head in the sand on this issue. Rather than keeping its taxes reasonable, the state has fought tooth and nail to preserve the State and Local Tax (SALT) deduction, which blunts the impact of state taxes on wealthy residents. Back in 2020, proposed legislation to institute a wealth tax would have attempted to tax residents even after they left — a scheme which almost certainly would have been found unconstitutional.
French King Louis XIV’s finance minister reportedly said that taxation is the art of plucking the goose for the most amount of feathers while producing the least amount of hissing. Unfortunately, it’s becoming ever more clear that the state’s leaders are wholly undeterred by any amount of hissing. California residents sick of seeing their tax bills go up every year should recognize that the only way to solve the problem is to pack up and leave.
Andrew Wilford is a policy analyst with the National Taxpayers Union Foundation, a nonprofit dedicated to tax policy research and education at all levels of government.