Dan Walters: If their taxes go up, will the wealthy go elsewhere?

dwalters@sacbee.comSeptember 24, 2012 

Dan Walters

The centerpiece of Gov. Jerry Brown's tax increase measure, Proposition 30, is a $5 billion a year boost in income taxes on about 150,000 high-income individuals and families – the 1 percenters who already pay 40 percent of California's income taxes.

Their marginal income tax rate, now 9.3 percent, would increase by one, two or three percentage points for seven years.

For those with more than $1 million in taxable income, the top rate would hit 13.3 percent, including a 1 percent surcharge for mental health services imposed by voters in 2004. California would have – by a wide gap – the highest marginal income tax rate of any state.

"Tax the rich" obviously has popular appeal, as new polls reconfirm, which is why Brown and his union allies chose that path.

But how would those targeted for the increase react, should voters pass Proposition 30?

Would they simply pay up? Would they shelter more income from taxation – delaying stock sales and other transactions that create taxable capital gains, for example? Or would they change residences to a state with lower or no income taxes, such as Nevada?

Almost certainly, all of those and other options would be exercised should Proposition 30 pass. And that's why predicting net revenue from such a hefty boost in marginal income tax rates is no more than an educated guess.

The notion that high- income residents would flee to other states has generated much debate as the Nov. 6 election nears.

Critics of the tax measure cite golfer Tiger Woods, who grew up in Southern California but relocated to Florida, which has no state income tax, as an example of how the rich have choices.

A better example, however, might be technology inventor Gilbert Hyatt who, by happenstance, is awaiting a Nevada Supreme Court decision in a 2- decade-old, high-stakes battle with California tax collectors over their efforts to declare him a taxable Californian.

Hyatt made millions of dollars from his technology inventions in the 1990s and, he says, moved to Nevada before he started reaping his bounty.

The California Franchise Tax Board aggressively pursued Hyatt for taxes but failed to collect them. Hyatt won a U.S. Supreme Court decision upholding his right to sue the board for harassment, and a Nevada jury awarded him $490 million in damages.

The case made its way to the Nevada Supreme Court, which heard oral arguments earlier this year. The FTB's attorney argued that the state had a right to vigorously investigate Hyatt while his attorney said Nevada must protect rights of its residents.

Should Hyatt prevail and California be hit with nearly $500 million in damages just as Proposition 30 passes, the path to a tax-free residency in Nevada will have been cleared for other rich people, if they want to take it.

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