Metropolitan News-Enterprise


Friday, December 19, 2008


Page 7



The Millionaires’ Tax — a Double Failure




In 2004, voters narrowly approved Proposition 63, the Mental Heath Services Act (MHSA), which imposed an additional 1% tax on personal income above $1 million. The funds generated from this “millionaire’s tax” were intended to expand county mental health programs. Taxpayer and business groups opposed the measure for a couple of obvious reasons. First, California is already a high tax, high spending state that didn’t need any more revenue. Second, as we predicted, Prop 63 would exacerbate California’s income tax volatility.

Although the final vote for Proposition 63 was tallied more than four years ago, evidence suggests that California’s most wealthy have continued to vote on this measure — with their feet. A recent survey from TNS Research, an international business research firm, found the California counties of Los Angeles, Orange and San Diego had the 1st, 4th and 6th highest number of millionaires in the country. However, even as the national population of millionaire households grew by 5.9% in 2007, Los Angeles County lost about 7000 of these households. Orange and San Diego Counties lost millionaire households as well.

Milton Friedman’s maxim that few things are as mobile as rich people and capital, is proven starkly by data showing the wealthy are leaving California in record numbers. It is probably no coincidence that, while California has been punishing the successful for the sin of being rich, Maricopa County in neighboring Arizona gained 23,000 new millionaire households in the same time period. Arizona’s top marginal personal income tax rate is 4.79%, less than half California’s rate of 10.3%, which includes the Prop. 63 surcharge.

When California millionaires choose to become Florida or Nevada millionaires, the consequences to the state’s economy is profound.

In California, the top 10% of earners pay nearly 75% of income taxes. If the trend of millionaire households relocating out of state continues, it will make finding the revenue to fund essential state services even more difficult.

Given that passage of Proposition 63 is responsible, at least in part, for the accelerated out migration of California’s wealthy, can we at least conclude that Prop 63 has done some good? Unfortunately, no. While the California Department of Finance is reporting a net domestic outmigration of taxpaying citizens along all income groups, DOF’s May 2008 audit of the MHSA states: “As of March 31, 2008, approximately $3.2 billion has been collected and $2.9 billion has been allocated for county use. Of the $2.9 billion allocation, $1 billion has been approved for distribution but only $726 million has been distributed to the counties.” This means that $2.174 billion is just sitting in the bank unused.

Similarly, much of the funding that has been distributed to counties still is not being utilized and is instead being held in reserves.

Total county Proposition 63 reserve funds statewide exceed $80 million. However, as we face a $27.8 billion budget deficit over the next 20 months, Proposition 63’s inflexibility prohibits counties from transferring reserves to fund other priorities.

The Department of Finance’s audit declares, “An overall documented plan for the development and implementation of the MHSA does not exist.” Furthermore, the audit cited ineffective communication between the Department of Mental Health, the Mental Health Oversight and Accountability Commission (an agency responsible for overseeing parts of the MHSA) and the counties.

The audit states the Department of Mental Health’s application of Community Services and Supports (mental health services for children and adults) guidelines has been “strict and inflexible,” and counties have therefore developed plans ranging from 300 to 1000 pages that meet the guidelines but not the needs of their communities.

Even supporters of Proposition 63 are concerned. It has been so unsuccessful that Rose King, a member of the measure’s drafting committee wrote in a Sacramento Bee op-ed, “Almost four years after passage, however, there is little evidence that the system has improved, and an infinitesimal number of clients are getting better treatment.”  So, just to be clear, in addition to driving those out of the state whom we can least afford to lose, Proposition 63 has failed abjectly to accomplish its goals and thus reflects the worst example to date of ballot box budgeting. Congratulations, Golden State. Once again, we have demonstrated why we rank so low in terms of effective governance.

Four years of hindsight should compel elected leaders to take two separate courses of action. First, the Legislature should pass all necessary laws to allow both the state and counties to tap into the unused Prop 63 funds to help address the current crisis. Second, recognizing that punishing the rich is a strategy akin to the old medical practice of “bloodletting,” Proposition 63 should be repealed immediately.

Republican leaders may be proposing this week to address both sides of the Proposition 63 unbalanced equation. But the chances that the majority party will take decisive corrective action to fix this double error? Zero.

(The writer is an attorney and president of the Howard Jarvis Taxpayers Association.)


Copyright 2008, Metropolitan News Company