I was in a discussion the other day, talking about how states with income taxes can end up hostage to a very small number of resident tax payers. New Jersey was the poster child I offered up but it has been a while since I have seen current numbers.
From California Budget Deficit is Even Worse than Gov. Newsom Initially Projected by Leslie Eastman. The subheading is In contrast, Florida Gov. DeSantis announces plans to expedite 20 major road projects across Florida using his state’s budget surplus. A nut unexpectedly partisan piece. But it does have some data.
California’s top income-tax rate is 13.3% on earners making more than $1 million. The top 0.5% of California taxpayers pay 40% of state income taxes. Volatile equity prices and layoffs at Silicon Valley companies are hitting capital gains. Companies are also cutting bonuses.
That's not good.
Well, maybe it's not so much of a problem if the state has multiple and diversified sources of income.
Nope.
Income taxes make up 66% of the General Fund revenues.
Through the magic of maths (66% X 40%), we can see that 26% of California's total spending depends on 0.5% of the richest taxpayers.
There are two obvious problems with that. One is a liberty and corruption issue. As George Orwell noted in 1984, "All animals are equal, but some animals are more equal than others." If you are one of the 0.5%, it is inescapable that you have outsized influence because the state has made itself dependent on you.
The second problem is that which afflicted New Jersey back circa 2008-9. They were dependent on a small number of wealthy taxpayers for a disproportionate amount of their annual budget. Not just a random selection of wealthy taxpayers either. They were dependent for their budget on the incomes of a small number of individuals all working in the financial sector.
It didn't take a general recession to destroy their budget. Just a bad year in the financial sector.
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