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It’s Your Money: D. Frank Norton

Escape from California looks reasonable

Posted: November 18, 2009 9:23 p.m.
Updated: November 19, 2009 4:55 a.m.
 
Taxes are doing us in. There is an old saying, apparently in New York, that goes like this: "The time to live in New York is when you're young and poor, or old and rich - otherwise you're better off somewhere else."

A Wall Street Journal opinion column (Sept. 8) referenced a study by the Empire Center for New York State Policy, that shows middle class people leaving the state in droves because of the extreme tax burden. I haven't seen a specific publication about a study here in California relative to the same issue, but I am sure California is experiencing the same outflow of middle to upper class people to other locales.

Given the top individual state income tax bracket of 10.3 percent (for those with taxable incomes more than $1 million), a corporate income tax rate of 8.84 percent, a state/local sales tax rate of more than 9 percent and high property taxes, no wonder we have people leaving California.

Recently, there was a book published entitled "Rich States, Poor States" by Arthur Laffer, Stephen Moore and Jonathan Williams which took a look at individual state tax structures and correlated those structures to the level of business activity on a state-by-state basis. The conclusion reached was that the states with the lowest overall taxation were experiencing the most economic growth. No surprise there.

Why can't California lawmakers grasp that basic truism? If you raise taxes as high as they are now for most Californians, you are stifling economic prosperity; indeed, even driving out those taxpayers capable of contributing the most to taxes and to economic development.

One chapter of the above referenced book was titled: "Texas vs. California." The chapter presented a sharp contrast between the California mantra of "let's tax the rich more" and Texas' stance of being tax-friendly to individuals and businesses alike. California is experiencing a much more severe economic downturn than is Texas.

One of the reasons cited by this chapter is: "California's fiscal system creates the boom-bust cycle in tax revenue that causes the familiar pattern of spending hikes during the fat years, which inevitably lead to crises every time the economy slows down.

"Specifically, the problem is that California has the most ‘progressive' income tax code in the country. Tax progressivity exaggerates the normal ups-and-downs of the overall economy, and explains why income tax receipts in California are among the most volatile of all the 50 states.

"When times are good, California citizens earn more, pushing many of them into a higher tax bracket, thereby giving the state a larger fraction of a bigger pie. But then the opposite holds true during recession: People earn less income in general, thereby shrinking the tax base, as many fall into lower tax brackets and pay a smaller fraction of smaller paychecks. This one-two punch explains why hard times seem to hit California harder than other states."

We certainly are being hit with a one-two punch now with not only a severe progressive income tax, but an added severe regressive sales tax. The apparent result of these moves is accentuated recession with over 12 percent out of work (not to mention another 8 percent or more underemployed). Add to this the flight of higher income taxpayers to more tax friendly climates, and we have a formula for continued economic malaise here in California.

Will our California lawmakers ever come to their senses and be willing to discipline themselves relative to spending? I have my doubts.

I understand that there are inexpensive homes for sale in Texas, Tennessee, Florida and even Nevada. Maybe it's time I wave goodbye to my home state of many years.

More on this in my next column.

D. Frank Norton is a money manager and financial planner in Santa Clarita. "It's Your Money" appears Thursdays and rotates between a handful of the Santa Clarita Valley's financial professionals. His column represents his own views and not necessarily those of The Signal.

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