According to CBS News, Napolitano was responding to about 24 student protesters who had taken off their clothes down to their underwear in opposition to the proposed 28 percent tuition hikes over five years.

“It’s an insult to have her as the president of UC,” said protester Kristian Kim. “I don’t know where she’s coming from, but I’m assuming she’s never had to deal with these issues personally. So I can understand why there would be a disconnect there.”

Napolitano later apologized.

CBS News added that, earlier in the meeting, public comments from Napolitano directly to the students were more congenial. She said, “They want to be sure that their voices are being heard and I want to commit to them that their voices are being heard.”

Napolitano’s annual salary is $570,000 per year. That’s 42 percent more than that of President Obama, whom she served under as the secretary of Homeland Security.

By Chriss Street

California State Controller John Chiang announced that total State revenue for the month of November 2012 fell $806.8 million, or 10.8 percent, below budget.  Democrats thought they could hammer “the rich” by convincing voters to pass Proposition 30 to create the highest state income tax in the nation.

But it now appears that high income earners have already “voted with their feet” by moving themselves and their businesses out of state, resulting in a shortfall of more than $1 billion in corporate and income taxes last month and the beginning of a new financial crisis.

Passage of Prop. 30 set off euphoria and expectations of higher spending for public employees.  The California Teachers’ Association trumpeted:

“California students and working families won a clear victory today as voters clearly demonstrated their willingness to invest in our public schools and colleges and also rejected a deceptive ballot measure aimed at silencing educators, other workers and their unions.” 

State bureaucrats immediately ramped up deficit spending far beyond the $6 billion annual tax increase, with the Departments of Health Services and Developmental Services increasing this month’s spending by more than $1 billion versus last year.  The lower tax collection and higher spending drove the state’s deficit after the tax increase to $2.7 billion for the first 5 months of the 2012-13 fiscal year, which began on July 1.  Chiang reported:

“November’s disappointing revenues stand in stark contrast to recent news that California is leading the nation in job growth, has significantly improved its cash liquidity to pay bills, and even long-distressed home values are starting to inch upward. This serves as a sobering reminder that, while the economy is expanding, it is doing so at a slow and uneven pace that will require the State to exercise care and discipline in how its fiscal affairs are managed in the coming year.”

The improved “cash liquidity” Chaing referred to turns out to be $24.9 billion of debt!

Wealthy people fleeing?

During the election campaign, Gov. Jerry Brown and his pro-tax coalition had the California Board of Equalization request a report from the Stanford Center on Poverty and Inequality, which claimed to have looked at state tax records and found no risk of the super-rich leaving.  Based on their access to California state income tax records from 1992 to 2009, the researchers concluded that millionaire migration is a myth by anti-tax advocates and “other factors, such as personal and business contacts, seem to weigh more heavily in deciding where to live.”

The study’s authors, Stanford’s Cristobal Young, an assistant professor of sociology, and Princeton’s Charles Varner, a doctoral candidate in sociology, expounded that the temporary nature of high earnings may help explain why the additional taxes didn’t cause a noticeable flight of millionaires.  Top income tax payers seem to fall into and out of the millionaire income bracket as their income rises and falls across the million-dollar mark from year to year.

Personal connections weigh more heavily than tax rates in deciding where to live and “people are tied to states for different reasons,” Young said.  “They don’t want to take their kids out of school; they want to stay connected with friends, with families … with business contacts.  People crowd together, from Silicon Valley to New York City, because of the returns associated with collaboration.”  The findings dispel the “market metaphor,” in which states advertise low tax rates in a competition to woo high-income individuals. “This is a poor representation of how people decide where to live.”

Young added that looking at the tax flight issue only scratches the surface of state financial woes. “People need to think about the depth of California’s budget problems,” he said.  “I think there’s much, much bigger things to worry about than this issue of tax flight because it’s really hard to find any evidence of it…. I hope people hear, listen to and absorb what the evidence says on this issue,” Young said.

Following the tax increase victory, Reuters News Service published: “Super-rich flight from California? Not so fast” to reassure that there would be very little risk that wealthy Californians would depart for income tax free Nevada, Washington and Texas.  Although “some Silicon Valley business owners had expressed interest in a move after California’s top rate was raised by 29 percent to 13.3 percent…business groups from the Beverly Hills Chamber of Commerce to the tech industry policy group TechNet backed the tax, and the state Chamber of Commerce took no position.”

As panic is spreading that goosing taxes on the rich may have created enough “tax flight” that California will actually collect less from taxes, there was welcome news that a business had committed to opening in the state.  Executives of the 99 Cents Only Stores Inc. proclaimed they would be opening a new location in Beverly Hills on formerly posh Rodeo Drive.

CHRISS STREET WILL BE IN STUDIO WITH PAUL PRESTON ON
“The American Exceptionalism Radio Talk Show”
Streaming Live Monday through Friday at 7-10 PM
Click here to listen:  http://www.mysytv.net/kmyclive.html

]]> https://calwatchdog.com/2012/12/12/ca-state-budget-goes-off-the-cliff/feed/ 52 35500 https://calwatchdog.com/2012/11/07/unions-totally-dominate-california/ https://calwatchdog.com/2012/11/07/unions-totally-dominate-california/#comments Wed, 07 Nov 2012 15:04:06 +0000 http://www.calwatchdog.com/?p=34325 6:39 am, Nov. 7, 2012

By John Seiler

California should change its name to Unionifornia. The public-employee unions won everything yesterday. They beat Proposition 32, which would have curbed their ability to siphon money directly from employees’ paychecks. They won Proposition 30, the $6 billion tax increase pushed by their kept governor, Jerry Brown.

They even defeated Proposition 38, the rival tax-increase initiative by lawyer Molly Munger, which would have plunked the added tax money directly into schools. By contrast, Prop. 30 has no real constraints, so the money can be siphoned off to union pensions.

The unions also re-elected Dianne Feinstein to the U.S. Senate. And their candidate for president, Barack Obama, won not only California, but the national election.

The problem for the ultra-powerful unions now is that the state and national economies are headed for breakdowns. Socialism never has worked.

For California, the millionaires hit with the new tax will start leaving. Brown, in the last days of the campaign, cited a study by two Stanford “poverty” professors (who themselves make huge salaries). We debunked the study here on CalWatchDog.com. But few California voters read CalWatchDog.com, only the smart ones.

By leaving, millionaires immediately avoid paying the state’s tops-in-the-nation state income tax of 13.3 percent. If they move to Nevada, Texas, Washington or other states with no income tax, they pay no state income tax at all.

But there’s more. Even if the millionaires stay, Prop. 30 grabs another $5 billion from them. That’s money they won’t have to invest in business and jobs creation. So the tax will hit all of us. Maybe a millionaire won’t buy the Rolls Royce he’s been ogling. But that means the minimum-wage mechanic at the Rolls dealership will be laid off and start collecting welfare.

The income tax increase also is retroactive for 2012. That means it will cost millionaires $5 billion now, and $5 billion in 2013. The giant sucking sound you hear is the California economy imploding.

Prop. 30 also increases sales taxes $1 billion. Meaning you and I will pay it. And it will kill more businesses and jobs — $1 billion worth.

More taxes

And Prop. 30 wasn’t the only tax increase to pass. Proposition 39 also passed, raising taxes $1 billion on out-of-state businesses that had created jobs here, but now might leave. It’s hedge fund manager Thomas Steyer’s initiative to funnel tax money into his favored investments. Expect other rich people to sponsor initiatives in 2014 that will do something similar: grab tax money to pad their own portfolios.

Brown and the unions don’t realize it, but they won’t get the money they want. The state’s anti-business climate is so penalizing, and made so much worse by the passage of Prop. 30 and Prop. 39, that tax revenue will decline faster than those initiatives can bring it in.

With Obama’s re-election, the national economy will start nosediving (not that Romney would have done any better). Another $166 billion in tax increases will hit the middle class on Jan. 1 when the payroll tax cut expires. Neither Republicans nor Democrats wants to keep the tax cut. That will hit middle-class American families with $1,000 in higher taxes in 2013.

We’re overdue for a recession anyway. They hit every four to six years. The last one hit in 2007. Add six to that and you get 2013.

The recession will bring more municipal bankruptcies throughout Unionifornia. The pension systems will keep teetering into insolvency. Unemployment will rise, and welfare rolls along with that, increasing the strains on the state budget.

The unions now own Unionifornia. And along with Brown and Obama, they’re going to have to take the blame for the crash.

When the crash happens, the time for reform will have arrived. In 2014, the reform movement should put on the ballot something like Proposition 75, the 2005 initiative that simply banned unions from directly extracting dues for politics from members’ paychecks. It got 47 percent of the vote even during the time of the booming economy (due to the phony real-estate boom that soon turned into a bust).

In 2012, Prop. 32 was much more complicated, including corporations in the paycheck protection, and got just 44 percent. Reformers need to make the 2014 decision simple: The ripped-off citizens vs. the ultra-powerful government-worker unions. People love a story about David (us) vs. Goliath (unions).

In two years, Unionifornia’s economy will be faltering badly, and voters will be in the mood for real reform. The time to plan is now.

By Wayne Lusvardi

When hosting TV game show “Family Feud,” the late host Richard Dawson made famous his line: “Survey says!”

There’s a new study out on how millionaires react to tax increases. What does the survey say?

“Millionaire Migration in California: The Impact of Top Tax Rates” is by Charles Varner and Cristobal Young, both of the Stanford University Center on Poverty and Inequality.

The study says:

* The flight of millionaires from California due to higher income tax rates from pending Proposition 30 is likely to be minuscule.  Only a maximum of 120 millionaires a year could leave or 1,200 over ten years. (Proposition 30 would raise the state income tax on those making $250,000 or more a year, with the top rate rising 3 percentage points, to 13.3 percent.)

* The highest income Californians were less likely to leave the state when the Mental Health Services Tax was passed in 2005.

* The number of non-resident millionaires who pay some taxes in California did not rise when the Mental Health tax was imposed.

* The 1996 state tax cuts did not have a consistent and substantial effect on retaining residents in California or attracting in-migrants from other states.

* The strongest out-migration factor was marital divorce.  Tax policies are “modest when compared to the life impact of marital dissolution.”

* Most millionaires fall into the highest tax bracket because of a peak year of earnings, such as real estate brokers, during the Mortgage Bubble.  So millionaires are not as likely to move if Prop. 30 passes, and their top income tax rate toes from 10.3 percent to 13.3 percent on a peak year of earnings.

Left out

Briefly, here is what the study didn’t say, or didn’t interpret properly:

* The largest out-migrations of Californians of all income levels have occurred during real estate booms such as the Mortgage Bubble, not during economic recessions. The largest net out-migration of California millionaires was in 2004, during the Mortgage Bubble, with 63 leaving (Stanford study, Page 22, Table 3.1).

* In-migration of millionaires from other states offsets the number of California millionaire out-migrations in most years. The larger problem is that the number of millionaires in California has declined by 61,410 since 2002. If this trend continues to 2019, when Prop. 30 expires, any tax increase on millionaires would be on 71,645 fewer millionaires than in 2012

* The percentage of those with incomes from $500,000 to $1 million that migrated out of California during the Mortgage Bubble from 2005 to 2007 rose 74 percent on average compared to the recessionary years of 2001 to 2004.

Divorce

* There were 150,180 divorces in California in 2003-04.  In that same year, only 857 millionaires and 63 net millionaires moved out of California. The gross number of millionaire out-migrants (0.5 percent) and the net number of out-migrants (0.4 percent) are too small to be of statistical significance to generalize that divorce is the main cause of millionaire tax flight.  Most statisticians warn that such small numbers can lead to hasty generalization.

* Divorce rates for the middle class tend to fall during recessions and rise during booms, albeit the data are mixed.  Divorce rates dropped during the Great Depression of the 1930s.  Divorce does not appear to be the main driver of relocation out of state unless it is related to home foreclosure, mainly for those in lower income brackets.  The Stanford study confuses a symptom for a cause and tends to reduce the reasons for out-migration to psychological marital incompatibility. Divorce is not the main driver for people to move to California, nor to move out.

* The imposition of the state Mental Health Tax during the Mortgage Bubble is not a valid indicator for tax flight during a prolonged managed depression.

* To conduct a valid scientific study about millionaire tax flight, a comparison needs to be made between millionaires who left the state and those that did not. Instead, the Stanford study made a comparison of a so-called “Control Group” of those in the $500,000 to $1,000,000 income bracket with a “Treatment Group” in the $1,000,001 to $1 billion income bracket.  This is obviously not a valid apples-to-apples comparison (see Table 3.3).

* Low tax rates and business regulations appear to have a significant bearing on choice of state to relocate to.  All the “sender states” with the largest number of in-migrants to California have unfavorable tax and business climates; and all the “destination states” have better tax and business rankings by a factor of two (2 X).  Even if size of state is considered, there is a much greater tendency for out-migrants to flee to low tax-low regulation states.

* If divorce were a large factor in out-migration, then we would expect out-migrants to tend to move back to old family and community ties in their states of origin rather than to low tax states.  But that is not the case.  Moreover, the researchers ignored what is called “strategic divorce,” or “postnuptial agreements” where wealthy couples divorce to protect assets when there is financial stress.

Out-migration

* A Mercatus Center 2011 study found that higher state income-tax rates cause a net out-migration of both higher income residents and all residents.

* Of course, all this controversy dodges the question: Will future millionaires avoid residing in California?

In conclusion regarding wealth redistribution by taxing the wealthy, as Nobel Laureate economist Milton Friedman wrote:

 “There is all the difference in the world, however, between two kinds of assistance through government that seem superficially similar: First, 90 percent of us agreeing to impose taxes on ourselves in order to help the bottom 10 percent, and second, 80 percent voting to impose taxes on the top 10 percent to help the bottom 10 percent.

“The first may be wise or unwise, an effective or ineffective way to help the disadvantaged — but it is consistent with belief in both equality of opportunity and liberty. The second seeks equality of outcome and is entirely antithetical to liberty.”

By John Seiler

Just in time for an election about raising millionaires’ taxes comes a study saying they won’t leave. Instead, when their taxes are raised, they’ll stay and shout, “Thank you, sir! May I have another!”

The California Budget Project is touting the study, “Millionaire Migration: The Impact of Top Tax Rates.” The study is by two professors, Charles Varner and Cristobal Young, both from the Stanford Center on Poverty and Inequality and the Department of Sociology at Princeton University.

According to the CBP’s summary:

“This new research dispels one of the most persistent myths about state tax policy: that wealthy Californians will leave the state to avoid having to pay a slightly higher tax rate on personal income.

“Using a highly rigorous study design that makes it possible to examine how state tax rates affect relocation over time, Varner and Young looked at the impact of the ‘millionaire tax’ that California voters approved in 2004. Their findings show that a higher personal income tax rate didn’t cause the rich to leave the state and also suggest that the risk of so-called ‘tax flight’ is outweighed by other factors, such as existing ties to family, friends, and career.”

“With California voters turning their attention to the November ballot, this new research undercuts the claim by opponents of Proposition 30 that this measure’s personal income tax increase, which would largely affect the top 1 percent, will drive high earners out of the state.”

So the study really is about having an impact on Prop. 30, which could prove crucial in a close election.

Does not compute

However, the study actually does not successfully prove its case. It looks at the effects of Proposition 63, which voters passed in 2004. Prop. 63 raised taxes 1 percentage point on incomes above $1 million to fund mental health programs.

According to the professors:

“This study addresses the following key question: Do changes in California’s top income tax rates lead to changes in the migration of top incomes?….

“This study tracks migration by, in essence, identifying taxpayers who file a California full-year resident tax return in one year and file a part-year / nonresident return in an adjacent year. We calculate the rates of in-migration and out-migration as a percentage of population for different income groups over the period 1994-2007. We then compare migration patterns before and after two recent California tax law changes.”

The other tax change looked at was the 1996 tax reduction, when Gov. Pete Wilson’s 1991 tax increase, which boosted the top tax rate from 9.3 percent to 11 percent, fell off the books.

The study provided a useful graph of the top state rate from when the first income tax was imposed in California in 1935. This is on top of the federal tax rate, I should add, which was 91 percent as recently as 1964.

And it provided another graph, which shows how progressive California’s tax rate is. Note how quickly the second highest tax rate, 9.3 percent, digs in: at just around $55,000 of income, which is lower-middle class in this expensive state.

The study explains:

“The basic face validity test on overall net migration trends showed no evidence for a tax effect, but top-income tax filers may be different. If they are different—and if tax rates are important factors in their state residency decisions—we would expect to find two patterns in California’s wealthy population. The number of top-income earners would fall after a tax increase and rise after a tax cut.”

And we get another good graph.

Their conclusions are shown in a chart:

So, it would seem that millionaires are unaffected by tax increases, or tax cuts for that matter. The study used control groups of those in different, lower, income groups. Their conclusion: “The only noticeable pattern here is that migration declines with income. Individuals at the very top seem to be more strongly attached to their current state than other slightly less wealthy individuals.”

On the 1996 tax cut, they write: “Migration ‘non-response’ to modest changes in tax policy is also relevant for policymakers considering tax cuts. Just as new top tax brackets do not drive millionaires to flee California or New Jersey (Young and Varner 2011), we do not expect tax cuts to influence top income earners’ state of residency.”

Their conclusion: “We have found no observable effect of two California tax changes on the migration behavior of high-income earners.”

Millionaires stayed

And they concluded that “out-migration declined among millionaires after the tax was passed (both in absolute terms and compared to the control group).”

So the millionaires apparently liked the tax increase so much they stayed to get more punishment.

This also is important:

“Migration is a very small component of changes in the number of millionaires in California. While the millionaire population sees a typical year-to-year fluctuation of more than 10,000 people, net migration sees a year-to-year fluctuation in a range of 50 to 120 people. At the most, migration accounts for 1.2 percent of the annual changes in the millionaire population. The remaining 98.8 percent of fluctuation in millionaire population is due to income dynamics at the top — California residents growing into the millionaire bracket, or falling out of it again.”

But the best explanation of all comes in the last paragraph of the study:

“Most people who earn $1 million or more are having an unusually good year. Income for these individuals was notably lower in years past, and will decline in future years as well. A representative ‘millionaire’ will only have a handful of years in the $1 million + tax bracket. The somewhat temporary nature of very-high earnings is one reason why the tax changes examined here generate no observable tax flight. It is difficult to migrate away from an unusually good year of income.”

That certainly is the case. Most people making $1 million or more a year have enjoyed an extraordinary event, such as a stellar year selling real estate. In other years, they might make only $300,000 or $500,000 a year.

What’s really going on

This is an important study because it is the best attempt anyone is going to make for saying that millionaires don’t leave California because of high taxes. But the study has several flaws.

First, the tax changes studied — the 1996 tax cut and the 2005 tax increase — came during boom times in California. The late 1990s enjoyed the dot-com boom. And the mid-2000s enjoyed the real estate boom. When things are booming, why leave?

The two boom-bust cycles were different. The dot-com boom was a real advance in technology, the commercialization of the Internet beginning in 1995. It was a unique event in world history. When the bust struck in 1999, a lot of companies, and investors, went belly up. But many companies of that era, such as Google, Ebay and Yahoo, survived and thrived, throwing off millionaires like sparks from a dynamo.

The real estate boom was fake, generated by artificially interest rates from the inflationist Federal Reserve Board, too-easy lending policies by the banks, Fannie Mae and Freddie Mac, the Bush administration’s irresponsible Keynesian deficit spending, and other dislocations. It had to end in a bad bust, and it did, beginning in December 2007.

Unfortunately, the Stanford study of millionaires ends in 2007. So we don’t see if millionaires left the state to escape high taxes during the Great Recession, in particular after Gov. Arnold Schwarzenegger boosted the top income tax rate from 10.3 percent to 11.3 percent from 2009 to 2011.

Silicon Valley

But a bigger problem for the study is that Silicon Valley continues to be a unique place not just in America, but on the planet. If you’re a young hotshot programmer with a 180 IQ, whether you grew up in Baltimore or Mumbai, Silicon Valley is the place to be. Austin, Tex., or Redmond, Wash., impose no state income taxes at all. But they’re not the center of the tech universe. Silicon Valley is.

In June 2004, Facebook moved from Massachusetts, which had a top state income tax rate of 5.4 percent. Mark Zuckerberg did not care that California soon would pass Prop. 63 and increase the top tax rate to 10.3 percent. He wanted to be in his Shangra-La in the valley of the silicon.

That happy circumstance is going to continue into the indefinite future for California. Although Apple and other companies are locating many of their operations in more business-friendly states, such as Apple’s gigantic server farm in North Carolina, the big brains always will want to live here. With Apple and Google expanding globally, their stock values seemingly rising higher every year, there’s no reason to think this will not continue.

A better study would exempt Silicon Valley millionaires from the statistics and see what the numbers then said. Because the real question is not the one asked by the professors, in their words, “Do changes in California’s top income tax rates lead to changes in the migration of top incomes?”

Rather, the real questions are, first: “Aside from Silicon Valley, where millionaires are not going to leave no matter what, do changes in California’s top income tax rates lead to changes in the migration of top incomes?”

Because that’s what affects most of us. Joseph Vranich used to compile a list of companies leaving California, 254 of which split in 2011. At least some of these companies paid top executives more than $1 million a year. Their exodus hurt local areas outside Silicon Valley.

That’s a main reason California’s unemployment rate, which dropped in September to 10.2 percent, still remains 2.4 percentage points higher than the national rate of 7.8 percent.

Where does the money go?

And the second question the Stanford study doesn’t ask is: “What effect do higher taxes on millionaires have on what the millionaires do with their money?”

As I keep saying, another name for rich people is business and jobs creators. Sure, they like their yachts and Rolls Royces. But there’s one thing rich people like more than such baubles: more money. And they get more money by investing in new business and jobs creation. If more of their money is taken from them through higher taxes, they will have less to invest.

Again, in California this effect is hidden because of the immense creativity of Silicon Valley. There was only one Steve Jobs, and he was born here, raised here and loved living in California. But as successful as he was, and Apple continues to be, their success would have been even greater if the state’s taxes were lower, leaving them more to invest. After all, until Jobs returned in 1997, Apple nearly died.

Companies and entrepreneurs need every advantage they can get in this increasingly competitive global marketplace. Higher taxes, including on supposedly untouchable millionaires, slow the engine that drives California’s prosperity.

By John Seiler

In the debate over the Proposition 30 and Proposition 38 tax increases, the question comes up: Will such tax increases drive millionaires from California?

The liberal-oriented California Budget Project just teased us with an email:

“In the debate around the revenue-raising measures on the November ballot, including Proposition 30, a persistent ‘urban legend’ has resurfaced: that increasing taxes on the wealthy would cause them to leave California. However, new research on the migration patterns of California’s personal income taxpayers could help put this claim to rest. 

“On Monday, October 22, from noon to 1:30 p.m., Charles Varner, doctoral candidate at Princeton University, and Cristobal Young, Ph.D., assistant professor of sociology at Stanford University, will discuss their new study that looked at Proposition 63’s ‘millionaire’s tax’ and found no evidence that millionaires left California in order to avoid the higher tax. Varner and Young will discuss their findings in a presentation titled Flight of the Millionaires?: Experiments in Taxing High Incomes in New Jersey and California, at an event hosted by the University of California Center Sacramento. For additional details, read the event flyer.”

I guess we know which way the study will look at this “urban legend” then “put it to rest”!

Except I personally know wealthy people who have left this state because of its high taxes. And Joseph Vranich used to tally the large number of companies leaving the state. Comcast and Campbell’s just relocated hundreds of jobs out of the state.

It will be interesting to see the study’s take on Prop. 63. It took effect in 2005, right in the middle of the real-estate boom. A lot of rich folks might have figured, “I hate this tax. But I’m making so much money off real estate, it’s worth it to stay.”

Then real estate crashed, of course, in 2007-09.

I’ll be looking at what years the study covers.

By the way, if raising taxes on millionaires doesn’t drive them out of the state, then why stop at raising California’s top state income tax rate at 13.3 percent, as Prop. 30 does? Why not raise it to 20 percent? How about 40 percent?