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Are Higher Taxes Killing California Tax Collection? 

Contributed by Chriss Street. Specialist in corporate reorganizations and turnarounds, former Chairman of two NYSE listed companies. His latest book, The Third Way, describes how to achieve management excellence and financial reward by moving organizations from Conflict and Confrontation to Leadership and Cooperation. He lives in Newport Beach, CA.

California state tax collection beat Governor Brown’s 2013-14 Budget by $4.3 billion, or 39.1%, last month over. The out-performance was due to two expected one-time events that took place by December: $1 billion in delayed sales tax deposits and $3.3 billion of taxes on capital gains, dividends and bonuses collected in January for a prior period. 

But in what should be very disturbing to giddy state politicians and lobbyists who are cranking up for a new spending spree, January sales taxes plunged by $582.7 million, or 27%.  It seems that “Taxafornia” finally raised taxes so high that affluent residents are moving their investment and spending elsewhere. 

Many financial analysts declared the California debt crisis over two weeks ago, after the Legislative Analyst’s Office said the state was on track to collect $5 billion more in tax revenue in January than estimated in the Governor’s budget.  The revenue was expected to come from high-income earners cashing-out of investments early to beat the rise from 15% to 20% in federal capital gains tax rates as part of the Congressional fiscal cliff deal.  But according Budget Director, H.D. Palmer: “As we always caution, you can’t assume or build a long-term trend -- good or bad -- off of one month’s worth of data, because any number of factors can swing one month either way.

California clearly enjoyed a windfall in January, with affluent residents paying $3.3 billion more in retroactive estimated tax payments under November’s voter approved Proposition 30 tax increase initiative and booking of capital gains, business income, and other income not subject to withholding prior to the January 1st federal tax increase. But collections fell far short of the anticipated $5 billion bonanza and sales taxes tanked.

During the Prop 30 campaign, the Howard Jarvis Tax-Payers Association  and other opponents warned that there is an inverse relationship, called the Laffer Curve, between rates of taxation and the resulting government tax collections.  Lowering tax rates incentivizes more investment, and the volume of taxes rises.  Raising tax rates strangles investment incentives, and the volume of tax collection falls.

Governor Brown, who led the pro-Prop 30 campaign, pooh-poohed concerns of competition from low cost states, like Texas. California has highest income tax at 13.3%, the highest sales tax at 7.5%, and the second highest gasoline tax at $.67 per gallon.  Brown promised that, if voters approved new taxes and if he cut spending, the 2013-14 Budget would achieve the first surplus in a decade.  At the news conference celebrating the passage Prop 30, Brown stated:

I think the real lesson here is that voters have trusted the elected representatives, maybe even trusted me to some extent, and now we've got to meet that trust.  But we've got to make sure over the next few years that we pay our bills, we invest in the right programs, but we don't go on any spending binges like we did in the days when we had the dot-com boom."

When asked how he would maintain discipline, Brown cited a mantra he performed every night before bed while studying at a Zen monastery in Japan in the 1980s:

"Desires are endless, I vow to cut them down."

Buddhism may provide Brown an inner-peace, but the 27% plunge in January’s sales tax revenue seems to indicate that California’s egregious taxation has driven many affluent residents to seek their inner peace by moving to states with lower tax rates. Contributed by Chriss Street.

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