THE DOWNWARD SPIRAL

California has the highest marginal income tax rate in the U.S. and is highly dependent on the income tax to fund its government programs and projects. In 2008 the top 5% of wage earners paid about 65% of income taxes and the top 20% paid about 85%. 80% of California wage earners pay little or no California income taxes. Thus, when Californians vote on a spending initiative it almost always passes because so few voters have “skin-in-the-game”. In the last four years California voters passed $4B for stem cell research, $2B for a high speed train (down payment only), $3B in the lame attempt to stop global warming single handedly and many Billions to build new, court ordered prisons. (Well over 50% of prisoners are illegal aliens.) Income taxes are a very unstable way to fund state governments especially as fewer and fewer pay more and more taxes. Relatively small variations in the economy cause wild swings in state income. First quarter 2009 withholding was 29% lower than 1Q 2008. When the economy is good politicians and voters cannot resist the temptation to commit to long-term discretionary projects. When the economy is bad (as it is now) the state has to further raise taxes on that 5% and make painful spending cuts. The average California voter cares little about raising taxes but cries loudly about spending cuts. “Nothing is more mobile than the rich.” per Milton Freedman. Many high-income taxpayers and businesses are simply moving to low/no tax states putting more pressure on the budget. The more tax rates are raised the less income results. I believe California is in a DOWNWARD SPIRAL and the poor and middle class will suffer the most but the rich will simply leave taking their income and their jobs with them.