Saturday, February 23rd, 2013 @ 3:42AM

mgp0cw-b781051076z_120130115163119000glb1bkhu6_5CALIFORNIA PROP 30

 

Propositions in politics are a tricky thing. How a proposition is written or what “cause” it is designed to supposedly help can sometimes bring voters to the polls to support measures they may not truly understand in the big picture. The latest example is California’s Proposition 30.  Last November voters went to the polls, propelled by Governor Jerry Brown and his fellow Democrats, to support a proposition designed to “save education in California”. Of course what the voters didn’t understand was the “saving” of education was in fact the replacement of the empty education coffers that were appropriated to other areas in the Governor’s latest budget.

According to an editorial from the OC Register that Schools will be shortchanged on Prop. 30

“As the California Legislature begins work on Gov. Jerry Brown’s budget proposal for fiscal year 2013-14, which begins July 1, it needs to look especially closely at two areas. First, of the $6 billion raised by Proposition 30, $2.7 billion will go to K-14 education. That’s less than half.”

 “Yet the Prop. 30 campaign led voters to believe that the majority of the money from higher sales and income taxes would go to schools.”

Of course what the voters really ended up supporting was a punitive tax that once again raised taxes in the state with the highest income tax rates in the country. Proposition 30, and it’s massive retroactive tax increase on capital gains and ordinary income that dates back to January of last year, now in effect, is catching many by surprise. For wealthy earners (Entrepreneurs) the top marginal rate jumped an astounding thirty percent to 13.3 percent of income.  Couple this with increased federal tax rates and California is beginning to look a lot like Europe. Beyond the simple raised tax rates the big catch is California doesn’t treat capital gains differently than ordinary income, thus the state has nearly doubled the fifteen percent federal capital gains tax rate, which applies to income earned in the past, for which taxes have already been paid.  These retroactive rates are creating a double hit for wealthy Californians who own and run a vast number of businesses that employ thousands.

The punitive nature of these retroactive tax rates are chilling.  The fact that the bill allowed this practice was largely hidden during the debate leading up to the election. Through a measure like this the state literally has the ability to reach back into the past and re-tax money already earned. The way the bill was written provides very little protection for taxpayers to dodge such practices.  There’s really nothing stopping the Governor and the state from reaching back into others years as well. For those building the businesses, entrepreneurs, and proposition 30 may fundamentally change their business model.  The startup model typically involves forgoing salary in exchange for deferred money through IPO’s and acquisition.  The practice of punishing users through Capital Gains will provide the impetus for many organizations to incorporate outside of California.

The Proposition 30 example is a great exhibit of the fallacy of “taxing the rich”. As states like California continue to increase the overall tax rates on high earners like Mickelson, they’ll continue to lose those earners to states like Florida and Texas.  The tax base will continue to dwindle as the State spirals into debt. According to National Review online between 2009 and 2010 Texas gained 93,000 residents from other states, the highest in the country.  This includes 15,000 from California.  The public (and politicians) have a skewed view of what constitutes the “wealthy”.  A great many of this upper income bracket are self-made hard-working business owners, entrepreneurs, who have built places like Silicon Valley through great ideas. California has a natural advantage with amazing cities and a wonderful climate.  Unfortunately at a certain point many business owners and wealthy individuals are going to decide that enough is enough—and the migration to places like Nevada, Colorado, Idaho, Montana and Texas will kick into overdrive.

According to a Fox News article this potential migration is in full swing.

Nevada tax accountant George Ashley said he’s received more than 100 inquiries from higher-earning Californians about the possible tax advantages and feasibility of relocating to a state with lower taxes.

“We have had a 10-fold increase from various parts of California, particularly Los Angeles and the Bay Area where many people are seeking a way to leave the state,” said Ashley, who lives just over the California state line in Lake Tahoe, Nev.. “They are fed up with the situation and they feel like they are being unfairly treated.” (Fox News)

A real debate is needed.  Of course the PC climate and progressive nature of the media won’t allow that debate to actually happen.  Instead we’ll get the endless scapegoating of the successful while the state balances the budgets and their pet projects on their backs.  Meanwhile business will adjust and move to areas that promote growth and allow these business owners to reinvest into their companies— not into their local governments.

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