State Legislature

Lawmakers Return to Capitol, Introduce Major Tax Hike

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The Legislature returned to Sacramento this week to begin the final half of its two-year session, and Assembly Members Ash Kalra and Alex Lee hit the ground running by introducing a tax increase to fund a government-run healthcare system estimated to cost more than $200 billion.

The progressive Democrats’ ACA 11, which includes a gross receipts tax on businesses, a payroll tax on employers and employees, and a personal income tax increase on middle-class Californians and high earners (see detailed descriptions below), would be the largest tax increase in state history. It would be imposed at a time when the state already has record-high reserves and a surplus of approximately $31 billion.

“This measure would add to the cost of living in California and lead to job losses, without any guarantee that the billions in new taxes would benefit anyone,” CalTax President Robert Gutierrez said. “Taxpayers want and deserve quality healthcare services, but there is no guarantee that a government-run healthcare system will deliver better care for Californians at an affordable price.”

The authors, who represent districts in the San Jose area, did not appear to account for the exodus of business and individual taxpayers that likely would occur if the tax increases took effect.

The pandemic has made it much easier for companies to hire remote workers, and this proposal would incentivize companies to look out-of-state for future hires. This is a major concern because under California’s steeply progressive tax structure, high-income taxpayers pay the largest share of the tax burden – the top 5 percent of earners pay approximately 67 percent of the personal income tax, the state’s largest source of revenue

ACA 11 provides the funding mechanism for AB 1400 (Kalra), which would create a new government health care bureaucracy and a right to health coverage for all California residents. A single-payer system could cost more than $200 billion a year, according to a 2017 revenue estimate in the Senate Appropriation Committee’s analysis of that year’s single-payer legislation, SB 562 (Lara). Adjusted for inflation, that estimate would be much higher now.

At a January 6 press conference on the steps of the Capitol, Kalra alleged that the government-run plan would be the “fiscally sound thing to do,” claiming it would eliminate copayments and insurance and reduce overall healthcare costs, ultimately saving money for businesses and employees. He called the single-payer plan a “moral imperative” that the state government should enact because it is “beyond unlikely” that the federal government will do it.

Supporters of the plan celebrated the decision of the Democratic leadership to allow AB 1400 to advance to a January 11 hearing in the Assembly Health Committee.

The taxes included in ACA 11:

A Gross Receipts Tax on California Businesses. Annual excise tax at 2.3 percent of gross income above $2 million for all qualified businesses in the state. (While official estimates have not yet been released, some preliminary estimates indicate that this would be a $108.1 billion annual tax hike, before accounting for likely changes in taxpayers’ behavior if the proposal is approved.)

A Payroll Tax on Employers and Employees. Employers with 50 or more employees would pay a 1.25 percent payroll tax rate on wages and other compensation of their employees (estimated revenue of $17.5 billion per year) and employees earning more than $49,900 in wages or compensation per year would pay a 1 percent payroll tax (estimated revenue of $14 billion per year).

A Personal Income Tax Increase on Income Over $149,509. California’s 13.3 percent top personal income tax rate, already the highest in the country, would increase to 15.8 percent. While the author describes the tax as one on “high earners,” it also would impact many taxpayers who meet most definitions of being in the middle class. The tax hikes proposed: 0.5 percent on income of $149,509 to $299,508; 1 percent on income of $299,509 to $599,012; 1.5 percent on income of $599,013 to $1,299,499; 1.75 percent on income of 0$1,299,500 to $2,484,120; and 2.5 percent on income above $2,484,1221.

ACA 11 also would amend the constitution to allow the Legislature to approve taxes with a majority vote if it determines there is an insufficient amount of funding in the healthcare trust fund. Additionally, the measure would circumvent the will of the voters by specifically excluding the billions in new revenue from being considered when calculating the voter-approved minimum school funding guarantee and state spending limit.

As a constitutional amendment, ACA 11 would need voter approval in a statewide election. To qualify for the ballot, it needs the support of at least two-thirds of the Assembly and Senate (the governor would not have an opportunity to sign or veto the measure).