California’s population declined by 367,000 last year, nearly a 1 percent drop. You’d think this would be a wake-up call for politicians to reconsider the economic policies that are driving people to move to other states. Not in the least. Instead, they are doubling down on the very same policies that have led businesses and people to leave the state at the highest rate in California’s history.
Democratic lawmakers have proposed a constitutional amendment that would increase taxes by $12,250 per household to fund a single-payer health care system. The economics behind this proposal is off-the-charts awful, and if passed, it will absolutely, positively devastate California’s economy.
Both the California State Senate and Assembly would need to vote in favor by a 2/3 majority for ACA 11 to become state law. Presently, the Democratic Party has a 75 percent supermajority in both legislative houses, meaning that there is nothing Republicans nor independents can do to stop this should Democrats choose to vote along their party line. Fingers and toes crossed that moderate Democratic lawmakers in the state understand that this would devastate California’s economy and lead to even more businesses and people leaving the state, including the most productive.
The tax hike includes a surtax on top of the current tax structure, which would begin at $149,500 (a healthy income in Fresno but well below the median household income in Palo Alto or San Francisco), and a new payroll tax that begins at about $50,000 for businesses with 50 or more workers.
For the most productive California earners, these proposed changes would increase their top marginal tax rate to about 18 percent, up from the current rate of 13.3 percent, and nearly four times the median of top-earner tax rates in the country. To put this in perspective, the second- and third-highest tax states, Hawaii and New York, would be far behind at 11 percent and 10.9 percent for their highest earners, respectively.
If the law is passed, the combined marginal tax rate for a top earner in LA County, including county sales tax, would rise to 67.15 percent (39.6 percent federal, 18.05 percent state, and 9.5 percent county sales tax). Just the personal income tax rate of 57.65 percent slightly exceeds the top marginal income tax rate in Sweden, Bernie Sanders’s favorite self-identified socialist country.
But California lawmakers don’t stop there. Their proposal includes adding a 2.3 percent gross-receipts sales tax on businesses generating above $2 million in pretax revenue. If you think that the state might have any economic might left after watching its highest earners leave rather than face an 18 percent income tax rate, then this tax would kill whatever was left. And for what it’s worth, Sweden has a very low corporate tax rate, as they understand their businesses would not be able to compete globally with a much higher rate. California lawmakers, are you listening?
US businesses have a pretax profit rate that averages around 8 percent, which means that a 2.3 percent tax on revenue is roughly comparable to a nearly 29 percent surtax on profits. Meanwhile, California has an 8.84 percent corporate tax rate, which is already one of the highest in the country. And what of those businesses that have a bad year or two? They will be at an incredible disadvantage.
Should this amendment pass, California would be one of the few states in the country with both a gross-receipts tax and a business profits tax. California is already losing many businesses to Texas, which has no personal income tax, no business profits tax, and a franchise tax rate ranging between 0.5 percent and 1 percent.
There is simply no way around the fact that this plan would make California incredibly noncompetitive in terms of state tax policies and the incentives that influence the growth of new businesses. Note that the 49-employee limit before incurring payroll surtax creates a cliff, in which an expanding new business that considers hiring a 50th worker can more than double the cost of that new worker. But the authors of this plan don’t seem to have any sense of the economic damage that this would create within the state.
On the contrary, the proposed amendment is written about as righteously as one might imagine. It begins with the hackneyed phrase that health care is a “right” for all Californians. This saying has become so trite as to have lost any meaning; if health care is a “right,” then shouldn’t affordable housing, clean and adequate water supplies, a healthy diet, and affordable energy be just as much of a “right”?
Ironically, California has succeeded in providing almost all with health coverage, whereas millions struggle with housing, water supplies (particularly agricultural producers), food, and energy costs. About 93 percent of Californians have health coverage, whether employer-provided plans, insurance purchased through exchanges (often with generous subsidies), or coverage by Medicare and Medi-Cal.
Who is missing coverage? Of those under the age of 65, the single largest group of the uninsured by far consists of the more than 1.2 million undocumented individuals from other countries. Of the remaining, there are 600,000 who are eligible for Medi-Cal but have not signed up for the plan, and another 600,000 who are eligible to buy health coverage with subsidies but choose not to. Another 500,000 have opted out of employer-provided plans, and there are a remaining 170,000 who could purchase unsubsidized insurance.
Clearly, access is not a problem for any of this group other than perhaps the undocumented. So Democratic lawmakers believe that tearing down the state’s health care system to offer single-payer health care to nearly 40 million should largely be based on 1.2 million undocumented not having coverage.
This is not to say that aren’t many improvements that could be made to what we have now. But the blind assumption held by lawmakers that government-managed single-payer care will bring down costs and improve quality simply is not supported by the experiences that we observe.
Does anyone really believe that California will provide quality health care for all at a competitive cost? Just take a look at the problems with VA health care within California or the number of problems within the state’s Medi-Cal system that have been investigated by the state auditor. Scaling up a single-payer program from these systems to 40 million people means enormously scaling up the failures of these systems.
And what of the stratospheric tax rates needed to fund the proposal? The authors write that the gross-receipts tax is the price businesses pay for the “privilege” of doing business within the state.
Privilege? Well, privilege is a loaded word that can be interpreted different ways, including the privilege of the taxes paid by our state’s businesses that help fund lawmakers’ pet projects.
But what is not loaded is the decision of businesses and people to remain here or move elsewhere, much as 367,000 net Californians left the state last year. In 2021, U-Haul reported that they couldn’t keep up with the demand from Californians for one-way out-of-state rentals. Should ACA 11 become law, you may want to get your name on U-Haul’s list now.
