California has had its fair amount of rough years. The state that was the face of American economic success for decades has been struggling with an alarming housing crisis, the highest unemployment rate in the country, an epidemic of theft, and, according to the 2020 census, the golden state actually lost population for the first time in its history. What is the proposal of the California state legislature to tackle these problems? A tax hike.
This year a bill was introduced in the Democratic-controlled California State Legislature to amend the state’s constitution and enact a wide-ranging set of tax hikes, ostensibly in order to finance a new single-payer, public health service. In order for the proposal to become part of the state’s constitution, it would not only need to be approved by two-thirds of both houses of the state legislature, but also to be approved by the public on a statewide ballot.
California has been under strong Democratic rule for years. Currently, the party not only has a “trifecta” (controlling both houses of the legislature and the governorship) but Democrats have ample control in each house of the legislative branch, as they have supermajorities (66%) in both chambers, leaving little tools for the California GOP to oppose the measure in the halls of the state capitol if Democrats coalesce around it.
Additionally, California Democrats have maintained a steady winning streak in nationwide elections for a while. Just last year, the embattled Governor Gavin Newsom managed to easily defeat the recall referendum that was activated by California Republicans following Mr. Newsom’s controversial handling of the COVID pandemic.
The governor, nevertheless, has tried to distance himself from the tax hike. He announced a plan to offer universal, public health coverage to all Californians, with an approximate cost of $2 billion. However, Newsom also said that his plan is completely different from the tax hike proposal that was introduced in the state legislature, as a spokesman for the governor saying “there are no tax increases associated with what the governor is proposing.”
Despite the apparent attempts of Mr. Newsom to separate his plan from the proposed tax hike, the political realities of both houses of the state legislature and the Democratic electoral strength in the state indicate that if Democrats coalesce behind it, the proposal has good chances of becoming part of the state constitution.
California’s tax hike in numbers
The proposal itself would increase taxes by $12,250 per household, according to a report made by the Tax Foundation, a non-partisan fiscal think tank. The package would raise a projected revenue of $163 billion a year, and it would do so by raising three specific taxes: implementing surtaxes to the top of the current individual income tax structure, adopting a 2.3% gross receipt tax to businesses, and a payroll tax system aimed at businesses that earn over $49,990. According to the Tax Foundation, the proposal would increase the top marginal tax rate (the additional tax paid for every additional dollar earned as income) of California to 18.05%.
The report also highlights many of the issues concerning the hike. For example, the payroll tax would only apply for businesses of more than 50 employees, meaning that companies would think twice before expanding their business as they could get penalized for growing. The proposal’s gross receipt tax would also be harmful to businesses as they are implemented regardless of the different profit margins of each company, meaning that some businesses would end up paying more in taxes than they collect in profits.
Finally, the report argues that the introduction of the new surtaxes would complicate the already convoluted tax system of California, effectively creating 18 tax brackets where people earning less than $50,000 would face a marginal tax rate of double digits.
The planned single-payer healthcare system would have an approximated cost of $200 billion, and the state is also planning to use last year’s budget surplus to fund the program. Despite the fact that California was able to raise a record amount of tax revenue last year, the growing population decline the state is suffering could be accelerated if the State Legislature decides to effectively double the tax rate to pay for an ambitious healthcare program.