As we reported last week, California is facing a $3.7 billion shortfall for the current fiscal year, and is projected to face a $12.8 billion deficit in fiscal 2013. There are now reports of two campaigns (one spearheaded by Governor Jerry Brown) for taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. hike initiatives that are gearing up to gather signatures for the November 2012 ballot.
The Jerry Brown initiative would hike the state-level sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. from 7.25 percent to 7.75 percent, and create three new income tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. for earnings over $250,000. Though official details are hard to come by–the Office of the Governor said in a call that they would release the plan later today–the Sacramento Bee reports that if passed, the new income tax brackets would be as follows (increases in bold):
|
Single |
1.0% |
> |
$0 |
Couple |
1.0% |
> |
$0 |
|
2.0% |
> |
$7,124 |
2.0% |
> |
$14,248 |
||
|
4.0% |
> |
$16,890 |
4.0% |
> |
$33,780 |
||
|
6.0% |
> |
$26,657 |
6.0% |
> |
$53,314 |
||
|
8.0% |
> |
$37,005 |
8.0% |
> |
$74,010 |
||
|
9.3% |
> |
$46,766 |
9.3% |
> |
$93,532 |
||
|
|
10.3% |
> |
$250,000 |
10.3% |
> |
$500,000 |
|
|
|
10.8% |
> |
$300,000 |
10.8% |
> |
$600,000 |
|
|
|
11.3% |
> |
$500,000 |
12.3% |
> |
$1,000,000 |
|
| 12.3% | > | $1,000,000 |
Note: Included in this tax bracket is California’s 1 percent “Mental Health Services Tax Rate” for taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. above $1,000,000. Some sources do not include this when reporting California’s bracket.
The sales tax increase would go into effect starting 2013, but the income tax hikes would actually be retroactively imposed to January 1, 2012. Retroactivity is obviously a concern for those of us who are devoted to sound tax policy, because a retroactive increase in income taxes would distort economic planning. Also, the retroactivity would leave many taxpayers writing a hefty check in April of 2013, because none of the revenue from the tax hike will have been withheld.
These increases would not help California’s competitiveness. In the 2011 State Business Tax Climate Index, California ranks 49 overall, and 48 in the Individual Income TaxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. Sub-Index (1 is best, 50 is worst). In our recent study on state and local sales taxes, California ranks 12 (50 is best, 1 is worst).
According to TaxAnalysts (subscription required), another initiative proposes:
- removing the Proposition 13 caps on taxing commercial property;
- doubling the $7,000 homeowner’s exemption;
- raising the renter’s credit; and
- granting a $1 million exemption from the tax on tangible personal property as a protection for small businesses.
Follow Scott Drenkard on Twitter @ScottDrenkard
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