Is it time to raise taxes on the rich? California Democrats call for new millionaire’s tax

California’s wealthiest households pay the highest income tax rate in the country. It could go up a few more percentage points if Democrats follow through next year on a new proposal that would levy on a new millionaire’s tax for seven-figure earners.

The concept has support from some of the state’s biggest public employee unions and Democrats in the Legislature. They argue the money is needed to support schools and government agencies that are charged with providing services to unemployed and struggling Californians.

“We’re actually talking about folks who are doing extremely well in the state of California, while the rest of California hurts,” said Assemblyman Miguel Santiago, D-Los Angeles. “There are some who are doing everything they possibly can and they just can’t make it work because the jobs are no longer available, the rent keeps increasing and it’s very difficult to put groceries on the table.”

California millionaires pay a 13.3% income tax rate, the highest marginal tax rate in the country, according to the Tax Foundation.

Assembly Bill 1253 would bump the rate by imposing three new surcharges on the state’s highest earners: 1% for taxable incomes over $1 million, 3% for incomes over $2 million and 3.5% for incomes over $5 million, meaning California’s wealthiest could pay 16.8% on their taxable income.

Combined with federal income tax, top earners would pay 53.8 percent of earnings above $5 million to the IRS and the state.

The increase would apply to any income earned after January 1 of this year. Tax filings next April would reflect the new rate. The legislation is projected to generate $6.8 billion next year, according to a labor union analysis cited by Santiago’s staff.

Santiago, a Los Angeles Democrat, said during a Monday committee hearing that AB 1253 would urge wealthier Californians to “pay their fair share” during an unprecedented crisis that’s rocked low-income communities of color financially hard hit by COVID-19.

California’s unemployment rate has surged to 14.9%, surpassing jobless numbers recorded during the Great Recession. Latinos comprise more than half of California’s COVID-19 positive cases.

“We need a plan for a safe and equitable recovery, backed by real revenue,” said April Verett, president of SEIU Local 2015. “COVID-19 continues to spread, pushing millions of Californians over the edge of financial disaster. A catastrophe awaits us. Our leaders must act with decisiveness and courage. We cannot afford the luxury of delay.

What the top 1% pays

California’s progressive income tax has wealthy households paying the bulk of the $90 billion or so the state collects in income tax.

In 2015, households earning $1 million or more paid 40% of the state’s income tax. They represent the top .4% of households.

The top 1% — people earning $500,000 or more — paid about 50% of the state’s total income tax that year, according to the Legislative Analyst’s Office.

During Monday’s hearing, state Sen. John Moorlach, R-Costa Mesa, said another tax increase could risk pushing businesses and entrepreneurs out of California, and make the state less attractive to those wanting to move in.

“We already have the highest personal income tax rate in the nation,” Moorlach said. “That may be a disincentive for people moving to California.”

While Santiago said the bill was urgently needed as California continues its fight against the health emergency, it is not scheduled for a vote this year considering time constraints caused by coronavirus disruptions in the Capitol.

Teachers, SEIU back tax increase

The legislation is backed by California’s most high-profile labor organizations like the California Teachers Association and the Service Employees International Union.

“We have the most billionaires of any state and [that’s] why we are calling on lawmakers and the governor to adopt additional revenues, including additional suspension of corporate tax credits and exemptions, capturing unrealized capital gains or imposing a tax on the wealthiest billionaires and millionaires to help our students, families and communities survive through this crisis,” California Teachers Association spokesperson Claudia Briggs said.

California last increased income taxes in 2012, when voters approved a ballot initiative targeting the top 1.5% of California earners. Wealthy households now pay a progressive personal income tax of 10.3, 11.3 or 12.3% depending on their bracket, according to the Legislative Analyst’s Office.

Per a 2004 ballot measure, those with incomes over $1 million pay an additional 1% surcharge, making their rate 13.3%.

Voters four years ago extended the rates in the 2012 measure through 2030. The rates in the new bill would be permanent.

Such an increase would be disastrous for California’s economy, said Jon Coupal of the Howard Jarvis Taxpayers Association, which advocates against tax hikes.

“[The bill] is a stupid idea,” Coupal said. “That exodus out of California by individuals of means will become a stampede if [lawmakers] do something this foolish. I have got to believe that cooler heads — even within the Democratic Party — will prevail and not let this move forward.”