Personal Income Tax

Union-Backed ‘Millionaire’s Tax’ Introduced in Final Month of Session

Increasing Tax Coin Graph

With just one month left in the two-year legislative session, a group of lawmakers this week introduced a union-backed proposal that would impose a large, retroactive personal income tax increase on income over $1 million (AB 1253, Santiago).

Senator Mike McGuire, chair of the Senate Governance and Finance Committee, announced that the committee will hold an August 3 testimony-only hearing on the bill.

CalTax opposes AB 1253, noting that California already has the highest-in-the-nation top tax rate of 13.3 percent, and this has been a factor in businesses and high-earning residents moving to other states.

Under AB 1253, the rate would increase to 14.3 percent on income between $1 million and $2 million, 16.3 percent on income between $2 million and $5 million, and 16.8 percent income greater than $5 million.

“As Californians struggle through a pandemic and recession, the last thing they need is a retroactive tax increase,” CalTax President Robert Gutierrez said. “California’s status as a high-tax state already has resulted in business flight and many lost jobs, and this bill would only make things worse.”

Under the bill, the combined state and federal tax rate for California’s highest earners would be 53.8 percent. With the federal deduction for state and local taxes capped at $10,000, they would not be able to deduct the new taxes from their federal returns.

“With many tech companies now allowing executives to work remotely for the next year, top earners could more easily leave the state and work in places with no income tax, like Nevada and Texas,” CNBC reported.

California’s personal income tax (PIT) is steeply progressive, ensuring that high-income residents bear most of the tax burden (in the 2016 tax year, for example, the top 1 percent of income earners paid 46 percent of the total PIT revenue, and the top 5 percent accounted for 66.6 percent of the total). The PIT is the state’s largest source of tax dollars, accounting for more than 43 percent of general fund revenue in the new state budget (in prior non-pandemic years, the PIT accounted for roughly half of general fund revenue).

Current rates range from 1 percent for the lowest income bracket to 13.3 percent for a single taxpayer with income over $1 million. California is one of 43 states that impose personal income tax. The states with the next-highest top rates are Hawaii (11 percent), New Jersey (10.75 percent) and Oregon (9.9 percent).