A tax on both their houses
By Gregg Easterbrook
The views expressed are his own.
New York Governor Andrew Cuomo just struck a deal with his state legislature for a long-term tax increase on the well-off, while California Governor Jerry Brown recently said he wants a November 2012 voter referendum aimed at raising the state’s top tax rate.
Conservatives predictably are in a tizzy, liberals in a transport of delight. Moderates might simply be glad to learn that California and New York are dealing with budget deficits on their own, rather than demanding a bailout.
Both states are moving to raise their top-rate taxes on personal income, making the rates border on confiscatory when one combines it with the federal and local taxes. Yet both are holding property taxes down. In June, Cuomo persuaded the New York state legislature to impose a cap on property taxes. California is entering its fourth decade of property taxes capped at a low level for most homeowners, under Proposition 13, passed in 1978.
Here’s the problem: Personal income is mobile — it can leave State A for lower rates in State B. Real estate cannot move: it must stay in State A.
Cuomo’s plan will raise the New York top rate income tax to 8.82 percent (a temporary “surcharge” about to expire was slightly higher). Meanwhile, across the state border, Connecticut’s top rate is 6.7 percent. For a well-to-do household, a move to the Nutmeg State might be very attractive.
On the other side of the country, Brown’s plan would raise California’s top rate income tax to a stunning 11.3 percent. Meanwhile, Nevada, right across the California border, has no state income tax.
But top earners may not have to actually uproot themselves to a lesser taxed state because courts can broadly interpret state residency rules. Former White House adviser Rahm Emanuel was able to spend many years living in Washington, D.C., and also satisfy the residency requirement for running for mayor of Chicago by telling a court he had “intended” to move to Illinois.
Think about a Hollywood mogul or Silicon Valley executive who makes $5 million a year, which would mean a $565,000 annual state income tax under Brown’s proposal. In theory, that person could buy a pied-ἁ-terre in Reno, use the address to stop paying California income taxes, and if pressed legally, say he or she “intended” to move to Nevada.
These New York and California examples assume that the rich will be completely honest with their taxes. But the higher state income tax rates are, the greater the incentive for a wealthy flier to hire a tax attorney who can make income appear to be earned in some other jurisdiction.
The actions by California and New York might bring a short-term revenue boost. However, long-term, high top-rate taxes may drive income to lower-tax states, leaving the Golden and Empire states worse off.
So, are the governors of two of the nation’s largest states crazy? No, they are pandering to the number-one voting bloc in the United States: senior citizens.
Seniors don’t pay much in income taxes. Even affluent senior citizens rarely reach top-rate territory for earned income. Instead, they tend to receive their income as interest, dividends and capital gains. But seniors do hold real estate, and complain vociferously about the property tax.
Last month the Pew Research Center reported that seniors are the best-off large cohort in America. Those over 65 years have a median net worth of $170,000, compared to $102,000 for those 45-54 — traditionally the peak earning years — and young adults have a median net worth of just $4,000. Seniors are also the only large group in the U.S. to receive federal income supplements via Social Security: an income-transfer program funded mainly by taxes on the young.
Political proposals to cap or hold down property taxes while raising top-rate income taxes sound like populist crusading against the rich. But this is just cynical politics, disguised as idealism.
Photo: Caroline Meeks, M.D., teaches a laughter therapy class to a group of seniors at the Clairmont Friendship Center in San Diego, California November 17, 2010. LAUGHTERYOGA REUTERS/Mike Blake