Wednesday, July 27, 2022

California Punishes High Income Earners: Iowa Leads, California Follows in Tax Competitiveness

In a 2022 ballot initiative, California progressives are pushing for passage of their deceptively entitled Clear Cars and Clear Air Act. In what represents a race to the bottom in economic performance, and in higher income taxes, the initiative raises the state’s top income tax rate by 1.75% to a non-competitive 15.1% surpassing New York City’s 14.8%. Despite a $100 billion 2022 state budget surplus, supporters of the $3.0 billion to $4.5 billion tax boost plan to use 80% of the booty to subsidize zero emission vehicles in the state.

Passage of the 2017 federal tax reform bill, which limited the deduction of state and local taxes on federal income returns to $10,000, made these California and New York taxes prohibitively high and incentivized the migration of individuals from high to low-income tax rate states. Furthermore, Covid-19 encouraged workers and entrepreneurs to work remotely and allowed them to exit cold, income tax hostile states for the warm environs of low-income tax rate states.

For example, the year after passage of the 2017 federal tax reform bill, real estate mogul, Barry Sternlicht, enhanced his net after tax income, and suntan, by moving operations of his Starwood Capital from high-tax Greenwich, Connecticut to no-tax Miami Beach, Florida. Likewise, Elon Musk, CEO of Tesla, moved company headquarters from high-tax California to no-tax Texas. Contrary to California, other states wasted no time in lowering income tax rates to hold on to workers, and/or encourage entrepreneurs to locate in their states. In the 2022 Iowa legislative session, Governor Kim Reynolds, and the Iowa Legislature, took the bold step of reducing the state’s income tax to a flat rate of 3.9%, thus joining 10 other states with some form of flat rate income tax.

For 2021, the 10 highest income tax states, and their top rates were: *California 13.3%, Hawaii 11.0%, New Jersey 10.75%, Oregon 9.9%, Minnesota 9.85%, *District of Columbia 8.95%, New York 8.82%, Vermont 8.75%, Iowa 8.53% and Wisconsin 7.65%.

How did these states perform economically compared to all states, and to no-income tax states? Data since passage of the 2017 federal tax reform and 2021 support the wisdom of lowering, not raising the top income tax rate. GDP growth numbers and migration numbers are listed in Table 1. The data show a clear economic advantage for states with a lower top income tax rate.

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