"Buffett Rule" a Bust in California

September 27, 2011

If President Obama really wants to see the "Buffett Rule" in action, he should look at California's tax system.  The state has been plagued by it for years, says George Skelton of the Los Angeles Times.

In California, there is what you could call a Buffett Rule-Plus.  There's an extra tax bracket -- at 10.3 percent -- for income exceeding $1 million.

  • According to the state finance department, families with adjusted gross incomes of between $1 million and $2 million, on average, paid an overall state tax rate of 8.4 percent in 2008, the last year for which data are available.
  • The average rate rose as incomes did to 9.3 percent for those earning $5 million and up.
  • Families earning between $200,000 and $300,000 paid, on average, 5.5 percent.
  • The rate fell sharply as incomes tailed off: 1.4 percent at $70,000 to $80,000, and only 0.2 percent at $40,000 to $50,000.

California used to offer preferential tax treatment for capital gains and dividends, but eliminated it in 1987 to conform to a new federal "reform" law.  The feds later reinserted their preferences, but California never did.  Consequently, California relies heavily on rich investors for its income tax revenue, which fuels half of the general fund.

Some examples of this overdependence, based on the 2009 tax year:

  • The top 1 percent earned 18 percent of California's income but paid 37 percent of the income tax.
  • Illustrating the volatility of the California income tax, however, the top 1 percent paid 48 percent of the total take in 2007 before the stock market collapsed.
  • In the next two years, the state's income tax revenue fell 25 percent.

Source: George Skelton, "'Buffett Rule' a Bust in California," Los Angeles Times, September 22, 2011.

For text:

http://www.latimes.com/news/local/la-me-cap-buffet-20110922,0,5024481,full.column

 

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