Is California's Tax Base Preparing to Flee?

June 12, 2006

In the wake of a defeat of California's Proposition 82—which would have increased California's top income tax rate to fund a preschool education program—there's an interesting article in yesterday's Los Angeles Times examining how California's rising state and local tax burdens may be approaching a "tipping point," encouraging wealthy residents to relocate to nearby lower-tax states. From the article:

 To live in California is to pay the highest state income tax rate in the nation, if you're wealthy enough.

Last week, voters had a chance to raise that tax rate to new heights by approving Proposition 82. They declined.

Did they figure that the Golden State's rich were already thoroughly soaked — or did 82, which would have funded universal preschool for 4-year-olds, just not present a convincing enough case?

The question is important to Bob Rodriguez, a principal at money management firm First Pacific Advisors Inc. and someone who is in Proposition 82's target demographic.

He fears that the electorate may yet be willing to embrace more tax-the-rich propositions. He sees these ideas as fiscally calamitous in the long run because they may induce high-income people to move out of state to avoid the tax hit. Drive out enough of the rich, Rodriguez says, and the state will have no choice but to demand more tax revenue from people much further down the income scale.

The 57-year-old Rodriguez says he would, in fact, have been driven out of his native state if Proposition 82 had passed. For months before the primary election, he told anyone who would listen that he would leave California if 82 were approved.

Nevada is right next door, after all, and it has no income tax, period. Proposition 82 would have raised California's top tax to 12% from 10.3%.

"I will not allow my assets to be expropriated," Rodriguez says.

The rant of a greedy millionaire who doesn't want to pay his fair share of taxes? Rodriguez knows that some will say so. But he comes to the discussion with a different perspective from that of many millionaires. His grandparents on his father's side had their wealth seized in the Mexican revolution of 1910, he says. They came here to start over.

Looking through that prism, Rodriguez sees a tax imposed on a minority by the majority as grossly discriminatory.

"If these services in society are needed, then everyone in society should pay for them," he says of the preschool program.

Read the full piece here. Check out our recent commentary on California's Proposition 82 here. For more on California's state and local tax climate, see our "California" section here.

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