CA Income Taxes Too Low For Berkeley Leftist

With the state facing a budget deficit in spite of years and years of record revenue increases, Leftists are predictably searching for new tax dollars to mine. Thursday's Berkeley Daily Planet contained this lovely piece encouraging higher taxes and spending.

One of the most frustrating parts of being a conservative pseudo-journalist in this liberal region is that the local newspapers won't take any time whatsoever to present contrary viewpoints.

Sam Frankel's argument here is, frankly, insane. Frankel argues that the state government should reinstate the full Vehicle License Fee and, far more damaging, raise the top income tax rate to 11 percent and decrease the state mortgage tax deduction.

Frankel's argument sounds like the statements made by the antagonists in Ayn Rand's Atlas Shrugged, where they blithely allocate the wealthy citizens' money, under the assumption it will always be there for the taking.

I wonder if many Daily Planet readers have ever stopped to take a look at state income tax rates around the country. If they did so, they might be surprised. This is an issue of sufficient import that I've decided to reproduce the table at the bottom of this blog post.

Please do take a look at the table. What you'll notice is something people like Frankel either want to hide from you, or something they are just too ignorant to find out. California already has the highest income tax rate in the country, and its rates are far higher than any neighboring states, with the exception of Oregon.

Arizona and Colorado charge 4.5 percent, Utah and New Mexico charge around 5 percent. Nevada and Washington charge zero!

It's been well documented that the state of California has chased of millions of middle- and upper-middle-class residents through its ridiculous income tax rates. Frankel argues that an 11 percent tax rate is one wealthy people "can easily afford." But what our friend fails to realize is that they might choose to move in spite of their purported ability to pay the tax.

Each time California raises taxes of any sort, some of our productive citizens leave for other states. I have yet to see a single study which analyzes the effect this phenomenon has on the state budget. As recently as 2006, a proposition introduced a 1 percent surtax on those making more than $1 million per year. What if this tax caused enough people to leave the state that it actually lost the state money? I guess we'll never know whether that was the case.

Leftists make the arrogant assumption that high earners have no choices. This is far from true. The information economy permits people more flexibility than ever before in their choice of where to live. Hence the flood of people leaving California for more tax-friendly states.

What California should be doing is lowering its income tax rate and spending to reduce this outflow. Otherwise, we will end up with more of the same -- more people with their hands out as those with the money disappear across the Sierra Nevada mountains.

So, without further ado, I present a list of states, all of which would be better choices for EBC readers hoping to lower their tax burden.

The Table

Oakland's Business-Tax Dragnet

This week, I received a letter from the city of Oakland indicating that I had failed to register the business I apparently run out of my house. The letter claimed I owed the city more than $5,000 in back-taxes.

I've read about these shakedowns in the past, and given the city's well-publicized revenue shortfall, I'm not surprised they're up the their tricks again.

So, on Tuesday, I dutifully collected together my past 3 years of federal tax returns, drove downtown and took a number at the city's business tax office.

After an hour of waiting, I spoke with a very helpful lady who indicated that I did not, in fact, owe anything. When queried about the matter of the $5,000, she replied that sending out letters with large dollar amounts is "the only way we can get people to come in."

I still have no idea how I was selected to receive this letter. But, I did take this chance to educate myself about Oakland's business tax system.

Like most of the policies of Oakland's city government, the business tax appears designed to scare off legitimate businesses from locating in the city. As you can see from the tax table, the city specifically targets what they call "Professional/Semi-Professional" businesses, including lawyers, accountants, etc.

Importantly, the 0.36% tax rate charged to these companies is based on gross receipts, not profit. So, for a business that has a profit margin of 25%, that's effectively a business income tax of more than 1%.

Back in 2001, the city received an analysis (pdf) indicating that its business tax is dramatically higher than those of surrounding cities. Shockingly, our tax on professional services business is 20% higher than that in San Francisco. Emeryville scores better in every single area -- a fact which probably helps explain their relative success at attracting business.

It's always surprising to me how hard the city of Oakland works to scare off businesses, and I'm always surprised when I go downtown that I see as many companies there as I do.

I came across another interesting facet of this story in my evening of worry before I cleared the matter up. I took a look at the relevant section of the Oakland municipal code.

What I found is a definition of "business" which is almost comically vague: "any activity, enterprise, profession, trade or undertaking of any nature conducted or engaged in, with the object of gain, benefit or advantage, whether direct or indirect, to the taxpayer or to another or others...."

So, basically, the city can construe anything you do as a business activity and tax you on it.

The code's definition of "gross receipts" is also extremely liberal. I won't quote it here, as it's pretty long. But suffice it to say that I'm pretty sure the city could find a way to construe almost any financial activity by a citizen as a "business" and then tax whatever money changes hands at a rate of up to 0.36%.

Someone needs to explain to the city that economic development is a competitive situation, and it depends strongly on such factors as a city's climate toward business. Setting business taxes at the highest levels in the region will not attract businesses to Oakland, no matter how much haranguing our city leaders do.