The Senate Governance and Finance Committee held a no-vote hearing August 3 on a union-backed proposal that would impose a large, retroactive personal income tax increase on income over $1 million (AB 1253, Santiago). The bill, which would increase California’s highest-in-the-nation top PIT rate of 13.3 percent to 16.8 percent, is not scheduled for a vote or any additional action.

Under AB 1253, the rate would increase to 14.3 percent on adjusted income between $1 million and $2 million, 16.3 percent on income between $2 million and $5 million, and 16.8 percent on income greater than $5 million. (Under current inflation adjustments, the actual thresholds for the 2020 tax year would be $1,181,484, $2,362,968 and $5,907,420, respectively.) The tax hike does not have an expiration date.

During the tax policy committee’s hearing, proponents characterized the bill as necessary to fund vital state programs, and said high earners can afford the increase.

“We’re going to ask those Californians who are doing very well to pay their fair share,” Assembly Member Miguel Santiago, a Democrat from Los Angeles, said.

Santiago, who wore a face-covering emblazoned with the union slogan “invest, don’t cut,” said the tax increase would be “very modest” for high-income residents and would help “the same California that gave them the ability to earn a high income.” He added that even though he does not have income sufficient to trigger the tax increase, he would gladly pay an additional 1 percent tax to help others.

Proponents said the tax hike would affect 0.5 percent of all tax filers in California.

Opponents noted that the relatively small number of taxpayers who would be impacted illustrates one of the proposal’s major flaws: if only a small number of these taxpayers left the state, suffered major losses or passed away, PIT revenue could plummet.

“The introduction of this legislation was a surprise to many, not only because of its timing so late in the year, but because of how it attempts to raise revenue,” said CalTax Vice President of Policy Peter Blocker, speaking for a broad coalition of taxpayers and associations that are opposed to the bill. “In recent years, much of the discussion surrounding tax policy in the Capitol has been about how to make our budget less volatile. While there are differing opinions as to how best to do this, most would agree that AB 1253 would do the exact opposite and set up California’s budget for failure every time there’s a dip in the economy.”

Blocker continued:

“To make matters worse, this proposal is retroactive. As the committee’s analysis points out, taxpayers had no way to predict that a retroactive tax would be debated during the eighth month of the tax year, so they haven’t been withholding at the level needed to cover the additional tax, and would get a substantial bill at the end of the year. … It’s also important to note that those who report income over $1 million are not a monolithic group. A tax return that reports earnings over $1 million is often the result of a one-time event, for example, the selling of a home by retirees. Higher taxes can have a significant impact on these filers.”

CalTax and other opponents also testified that California’s steep income tax rates have been a significant factor in businesses and high-earning residents moving to other states, and AB 1253 would increase the exodus.

Under the new rates, the state’s top earners thus would be required to give more than half of their annual income to the government in income taxes alone (the combined state and federal tax rate for California’s highest earners would be 53.8 percent), on top of any property tax, sales tax, gas tax, etc. With the federal deduction for state and local taxes capped at $10,000, they would not be able to deduct the new taxes from their federal returns.

Senator John Moorlach urged proponents to consider the impact that the tax hike would have on behavior. He said revenue from high-income earners in Connecticut went down significantly after the state increased taxes on the wealthy because many people moved to lower-tax states.

“It’s not static,” Moorlach said. “If you have people move, it gets real interesting.”

Moorlach noted that when billionaire businessman David Tepper moved from New Jersey (which has a top income tax rate of 8.97 percent) to Florida (which does not impose a state income tax), the impact on New Jersey’s budget was so large that state officials held a special hearing to discuss how they would deal with the revenue loss.

Senator Jim Nielsen expressed frustration that many tax increases have been proposed, but none of the proposals includes anything that would make the government better or more efficient.