Tuesday, July 14, 2009

goin' ta California II

From a comment dated 17 August 2008 that responds to a post on TaxProf Blog:
How do you suppose California gets into its awful boom-n-bust state budget cycles? That's right, it's because the tax system is hugely progressive. Something like half the state budget depends on the tax income from the top 100,000 earners in California.

Looking at a comparative state income tax table, one can see that California has one of the widest rate ranges in the union. The breakdown for California indicates that the top 9.3% rate starts at $64 050 for individuals (the top rate is, in fact, 10.3% but that applies to incomes over $1M). Individuals with incomes under $43 814 pay less than half this amount on a percentage basis and the marginal rate for those with incomes under $33 989 is less than half again (2%). The incomes of those in the higher brackets is more variable primarily because investment income is highly cyclical.

This does not tell the whole story, either. California has a higher corporate tax rate than average, and corporate tax revenues are significantly more cyclical than either income or consumption taxes. If one looks at a graph of recent US tax revenues, the drop in payroll tax revenue is not especially noticeable but the slump in corporate tax revenue is remarkable.

What does this mean for Alberta? Given Premier Stelmach's "no tax increases" pledge, the safe money is that Ed will try hiking royalties (again), on the grounds that royalties are not taxes. Yet royalties are the most cyclical form of revenue available to the province. Although I don't have a study to prove it, I predict that they are also the most subject to Laffer curve effects, given the inverse relationship with land bonuses and the fact dynamic scoring considerations are considerably more relevant to corporate tax policy (which royalties are most akin to) than to income or consumption tax policy.

The Premier says he wants to stabilize the boom/bust cycle, yet instead of hitching the government's revenue wagon to a relatively level tax like a broad based VAT, it appears Steady Eddie will put the bucking bronc of royalties into full harness. For the second time after getting thrown the first time.
Insanity: doing the same thing over and over again and expecting different results.
- Albert Einstein

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