California to Seek Increased Income and Sales Taxes

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 tax hike initiatives that are gearing up to gather signatures for the November 2012 ballot.

The Jerry Brown initiative would hike the state-level sales tax from 7.25 percent to 7.75 percent, and create three new income tax brackets 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):

Note: Included in this tax bracket is California’s 1 percent “Mental Health Services Tax Rate” for taxable 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 Tax 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.

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