Doug Thorburn sent me a nice presentation that he wrote on the tax situation in California. In spite of having the highest taxes in the nation, the state is broke.

Doug Writes:

The state legislature recently approved tax increases for 2009 and 2010 that catapulted the state’s high-tax ranking to number one in the country. Several propositions that would have extended these increases for another few years were placed on the May ballot. Surprisingly, Californians rejected them down by roughly two to one margins.

California voters have elected and re-elected arguably the most extravagant spenders of other people’s money of any state. Democrats, with a huge majority, uniformly approved of the higher taxes. Republicans, barely a one-third minority, almost uniformly opposed them. California voters leaned Republican on arguably the most significant issue of the day while voting for Democrats. This is either schizophrenia at its finest, or the beginning of a popular rebellion against high taxes.

Californians might have rebelled long ago had they known that state spending, adjusted for population growth and incomes since 1997, would be about two thirds of 2007’s actual spending. To get a feel for the extraordinary increase in taxes, which translates to spending, over the decades, a history of sales tax rates can be helpful. This tax was a mere 5% during the early 1970s. The rates below do not include district taxes averaging 1%, which were probably non-existent early on.

History of Sales Tax Increases

According to Wikipedia, “Over the past 10 years state spending from state sources has more than doubled in nominal terms (not adjusted for inflation), and during the current governor's tenure state spending from state sources has risen almost 40 percent.”

When we adjust for today’s current relatively low inflation we can begin to see just how profligate state government has been.

To be fair, however, we need to adjust for both inflation and population growth. Let’s be fair.

Now we can see just what spendthrifts—with other people’s money no less—the state’s politicians have been since FY 1997-1998.

This is an enormous and, as we have recently learned, unsustainable growth in government spending. From 1979 through 1990, the Gann Amendment limited the growth in state spending to inflation and population growth. Not only does such a spending limit need to be reinstated, but also the fact that high-income earners pay an inordinately large proportion of state income taxes needs to be addressed.

In 2006, the top 15% of state taxpayers paid 84% of personal income tax. The top 1% paid 48% of all such taxes (up from 39% as recently as 2003). These taxpayers can vote with their feet. Recently, when Maryland increased its rate on top income-earners, one-third of those who were hit by the tax became non-residents the following year (they probably converted what were vacation homes in Florida to main homes).

Maryland actually lost revenue due to this tax rate increase because the extra percent they took from the two-thirds of high income taxpayers remaining was more than offset by the 100% drop in tax collections from the one-third who left.

The approximate additional tax paid by a single person for the privilege of living in California vs. a selection of other states follows:

Doug has a website at http://www.dougthorburn.com/

Thanks Doug.

One small point: Maryland and many other states have declining revenues not just because people are leaving the state, but because of the sharp dropoff in collections due to the economy. However, many will indeed be voting with their feet as Californian citizens receive very little for the taxes collected.

Municipal workers and those on state pension plans are doing quite nicely, however. Everyone else foots the bill.

Mish

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