There has been much discussion in recent years of California’s tax and business climate—and it has not been very flattering. California owns the dubious title of highest tax bracket in the nation, at 10.3 percent. Even the state’s second-highest bracket (9.3 percent), collected on those earning more than $41,500 in taxable income, ranks below only Vermont’s 9.5 percent rate. High taxes, onerous regulations, perennial government overspending and multi-billion-dollar budget deficits, and a high cost of living have caused many to question whether it is still worth it to live and do business in California.
Public perception of the Golden State’s poor living and business climate has been substantiated by a number of studies. The Tax Foundation’s 2006 Tax Freedom Day Report concluded that California has the ninth-highest total tax burden in the nation, and that Californians must work an average of 120 days this year—four days longer than the national average—just to pay off their tax burden.
The Pacific Research Institute’s 2004 U.S. Economic Freedom Index analyzed 143 variables in five categories (fiscal, regulatory, welfare spending, government size, and judicial/property rights) to measure states’ economic freedom. California ranked 49th overall, surpassing only New York. Among the subcategories, it placed 48th in fiscal, 48th in welfare spending, and dead last in regulatory.
Yet another Tax Foundation study released in February compared the burdens of states’ corporate, individual, sales and gross receipts, and unemployment insurance taxes, as well as a wealth index. Once again, California proved lacking, placing 40th overall on the State Business Tax Climate Index. Compare this to neighboring Nevada and Oregon, both of which placed in the top 10 and offer significantly better alternatives for many businesses.
Business owners have certainly taken notice. According to the Nevada Economic Development Partnership, 38 California businesses relocated or expanded to Nevada in FY 2003-04, resulting in 1,500 jobs lost to our eastern neighbor.
Even California’s signature motion picture industry is looking for greener pastures. Film productions are moving to other states and Canada, and a recent Film L.A. study reported that television pilot productions are also relocating, costing many jobs and draining local economies, particularly in Los Angeles.
Small business owners are particularly hard hit by California’s tax policies. According to the California Taxpayers’ Association, the richest 10 percent of earners pay nearly 75 percent of the entire income-tax revenue in the state, and most of these are small-business owners. Thus, under California’s backward tax policy, the very entrepreneurs responsible for economic growth and prosperity are being punished the most severely.
Given California’s tax-happy political culture, it is no wonder the wealthy and the successful are leaving the state in droves.
Unfortunately, there does not seem to be any relief in sight. Gov. Arnold Schwarzenegger and the Democrat-controlled State Legislature have proven unable to control government growth and spending. Yet, Schwarzenegger proposes $37 billion in infrastructure bonds and his gubernatorial opponent, Phil Angelides, proposes numerous government programs estimated to cost an additional $5 billion to $10 billion.
California’s taxes are overly burdensome and are stifling economic growth in the state. Even when they do not drive people and businesses out of the state altogether, they take away resources that would otherwise have been invested in new jobs, new businesses, and better products. If the state does not reverse course, its tax and regulatory policies will continue to bleed its most productive, entrepreneurial residents and its economic growth.
During the early 1990s, high tax rates spawned a mass migration of the wealthy to more friendly environs and led to a fiscal crisis. It appears California is intent upon repeating its costly mistake.
Adam B. Summers is a policy analyst at Reason Foundation. An archive of his work is here and Reason’s California research and commentary is here.