This summer, the Los Angeles Democrat ushered through the Legislature a measure that substantially amends in advance the ballot measure’s ammo regulation provisions — a move a Prop. 63 spokesman at the time called “sickeningly cynical.”   

For about a year now, de Leon has been in a political feud with Lt. Gov. Gavin Newsom, Prop. 63’s primary proponent. The two fought over who had better ideas for gun and ammo control and what lawmaking avenue was more appropriate: the Legislature or the Ballot Box. And at least for now, de Leon won. 

None of this was mentioned in the endorsement. 

“Earlier this year, our Legislature passed the most sweeping and important package of gun safety laws in the nation, increasing nationwide momentum and grass-roots outcries for common-sense safeguards against gun violence,” de Leon wrote in a statement. “I endorse Proposition 63 because we must send a powerful and united message to the national Gun Lobby that California will not capitulate to political bullying or compromise the public safety.”

Critics cry foul

Republicans in the Assembly tried to fight de Leon’s bill as it moved through the Legislature, arguing on procedural grounds, and were easily overruled. In an interview this week, Assemblyman James Gallagher, an attorney by trade, called de Leon’s actions “ridiculous,” adding the Los Angeles Democrat is “trying to change what might be the will of the voters.”

“The voters are being asked to vote on something right now that, if passed, [the Legislature is] going to change the language,” said Gallagher, a Nicolaus Republican.

Gallagher opposes both Prop. 63 and the de Leon bill, but said the procedure matters: “Is that the kind of precedent that we want to set?”

Legal analysis

But, in fact, it may be legal.  

“I don’t think I have seen this before, but it looks legit to me,” said Frederic Woocher, an elections law specialist at the Los Angeles law firm Strumwasser and Woocher, who has no connection with either the ballot measure or the legislation. 

Prop. 63 does allow for legislative amendments, as long as they “further the purposes” of the measure and pass by at least 55 percent. According to Woocher, since the Legislature has the power to amend the measure, and since the legislation won’t go into effect until after Prop. 63 would pass, this is akin to passing the legislation next year — like postdating a check. 

“Under this admittedly unusual circumstance, I believe it would constitute a valid amendment to Prop. 63 under the initiative’s provisions allowing for amendments (again, this assumes that it ‘furthers the purposes’ of the initiative),” Woocher said. 

But is it transparent?

Where Gallagher and Woocher disagree most though, is whether the Legislature’s move is transparent. Gallagher said that the voter-fatigue inducing, 17-measure ballot and accompanying voter guide already make the process cumbersome on voters — adding pending legislative amendments makes matters worse.

“It’s bad enough that you have this huge voter pamphlet; let alone to have to go ‘Oh, well, also the Legislature may have passed a bill that’s going to change this language,'” Gallagher said.

But Woocher argued that because the Legislature took action prior to the November election, and the Legislative Analyst’s Office was able to consider the amendments in its analysis, interested voters will have the opportunity to become fully versed.

“The amendments may not be reflected in the title and summary per se … but I think it is not unreasonable to expect interested voters to review the entire Voters’ Pamphlet, which includes the Leg Analyst’s more in-depth and explanatory analysis of the expected impacts of the measure’s passage,” Woocher said. 

A spokesman for Kevin de Leon did not respond to multiple requests for comment.

In 2004 California voters passed Proposition 63, based on the promise it would tax the rich to help the state’s mentally ill population. But 10 years later, while it’s been successful in taking about $10 billion from top earners, state officials are largely clueless about whether the money has been well spent.

The problem is a “dilapidated, antiquated” data collection and processing system, according to testimony at a recent hearing of the state watchdog agency the Little Hoover Commission.

The proposition known as the Mental Health Services Act increased the tax on personal income over $1 million by 1 percentage point, affecting an estimated 25,000-30,000 people. In the 2007-08 fiscal year, the MHSA tax brought in $1.5 billion; but the Great Recession shrank that to $849 million in 2011-12, the last year closely scrutinized. A total of about $9.5 billion had been allocated to counties through 2013-14.

The problem is that no one knows whether the money has actually helped the mentally ill. Karen Baylor, deputy executive director for the California Department of Health Care Services, which is in charge of collecting the data, isn’t sure.

“I think the question is: Do we know that these dollars that translate into services make people better?” she told the commission. “I think we do have data and know how the money is being spent. Do we know the efficacy of these programs? No, we don’t.”

Lack of data

Earlier in the hearing, several mental health advocates expressed their frustration at the lack of data.

“And we certainly understand the frustration,” said Baylor. “The act has been around for 10 years and we don’t have any evaluation, and we understand that. We just became involved with this in the last year. So I can’t explain to you what the former Department of Mental Health did because we weren’t there.”

(Under Assembly Bill 102, a reorganization  passed in 2011, the DMH was replaced by the Mental Health Services Division of the California Department of Health Care Services.)

Her testimony came more than a year after an Aug. 2013 state audit criticized the lack of oversight of county mental health programs by the DMH and by the Mental Health Services Oversight and Accountability Commission.

“We found no evidence that Mental Health performed on-site reviews to ensure that county assertions about their compliance with MHSA [Prop. 63] requirements and use of funds were accurate and proper,” the audit said. “None of the entities charged with evaluating the effectiveness of MHSA programs – Mental Health, the Accountability Commission, or a third entity – have undertaken serious efforts to do so.

“Mental Health either did not always obtain certain data or did not ensure counties reported the required data. The Accountability Commission did not adopt a framework for evaluation until recently – more than eight years after the passage of the MHSA.

“Each of the four county departments we reviewed used different and inconsistent approaches in assessing and reporting on their MHSA programs, and the county departments rarely developed specific objectives to assess the effectiveness of the programs.”

Mentally ill

The U.S. Department of Health estimated in 2009 that 4.8 percent of adults in the country are seriously mentally ill, according to the audit. That equates to more than 1.8 million seriously mentally ill Californians, who may – or may not – be benefiting from the $10 billion taken from California’s top earners.

“[S]ome counties could not effectively demonstrate through their processes that their MHSA programs are achieving the stated intent,” the audit said. “[They] rarely developed specific objectives to assess the effectiveness of program services. Media reports have reflected skepticism about counties’ Innovation programs, some of which include acupuncture and yoga.”

Acupuncture and yoga are just the tip of the spending-waste iceberg, according to mental health advocate Mary Ann Bernard. In a California Progress Report article, “Legislative Fix Needed To Stop Waste of Millions Earmarked For Severe Mental Illness,” she wrote MHSA funds have been spent on:

“[E]lementary school programs about bullying, therapeutic gardening for unhappy Hmong refugees, horse therapy for troubled teens who are not mentally ill, a support group for gay and lesbian teens, parenting skills programs, a support program for unwed mothers, a hip hop car wash, homework help programs for non-mentally ill students, yoga and ‘Soul Chi’ for the stressed, among other things.

“These may be fine programs, but they are hardly ‘effective’ and ‘successful’ at preventing or shortening the duration of ‘severe mental illness,’ as required by law.”

Mental health funds also have been spent on sweat lodges for Native Americans and massage chairs for students, according to the Associated Press.

Prop. 63 has created “a cottage industry of consultants earning up to $200 an hour, as well as a host of new programs that in many cases are only loosely linked to prevention, treatment and recovery,” reported a Bay Area News Group examination of the spending.

The article quoted Prop. 63 co-author Rose King, “The state of California clearly did not comply with the law, and they did not keep and honor the contract with the voters. It’s a corruption of purpose, and it’s a boondoggle for consultants and entrepreneurs at the expense of core services.”

Helped

But amid the waste of tax dollars there also are people being helped. A Mental Health Services Oversight and Accountability Commission press release summarized a July 2014 study by the UCLA Center for Healthier Children, Families and Communities:

“Hundreds of thousands of Californians at risk of or with early symptoms of mental illness are being helped by Proposition 63’s Prevention and Early Intervention (PEI) programs …. [C]hildren, youth, young adults and the elderly are experiencing reduced homelessness, school dropout rates and unemployment through PEI programs.”

MHSOAC Chairman Richard Van Horn asked the Little Hoover Commission to help obtain more funding from the Legislature to provide better oversight of county mental health spending.

“The issue is that we have not had a data system that is modern,” he said. “We have legacy systems. Legacy systems can drive you to the ground because you can’t get the information out once you put it in. We need to have a system statewide in which counties, agencies can talk to each and all can talk to the state. The state can talk back to them. This needs to be a fully interactive system.

“That is an expensive proposition. The fact that you have got 0.1 percent [of MHSA expenditures] going to evaluation at the state level in a $6 billion system is sheer craziness. But that’s what we’re stuck with at the moment. You guys have a different kind of political clout than we do. And we need your help in making this happen.

“This is a learning process. We are way ahead of other states. Everybody is looking at California because we had the brass to pass this thing 10 years ago. Now we have to put the proper infrastructure in so that not only will we know the results [of mental health programs], but be able to communicate those results.”

Little Hoover Commissioner David Beier agreed it’s up to the state Legislature to fix the oversight problem.

“The person who has the money is going to dictate whether there’s going to be compliance,” he said. “With an initiative it defaults to the Legislature. In this, legislative oversight is the key component to driving change. They need to be a key participant. They have the purse strings. I would hope that one of the things that would come out of this [hearing] is a sense of urging the Legislature to do a focused job of oversight.”

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.