Capital News & Notes
For Clients & Friends of The Gualco Group, Inc.
IN THIS ISSUE – “They Are Not About to Roll Over”
BUDGET, BALLOTS, BILLS (Dollar) & BILLS (Legislative)
- Final State Budget for 2018-19
- Fall Ballot Propositions by the Numbers You Need to Know
- Proposition Generating Heat & Light: Gas Tax Repeal
- Healthcare Industry Top Spenders on Campaign Donations & Lobbying
- Pending Legislation Allow More Campaign Cash to Legislative Leaders
- New Initiative Process Sparks Unanticipated Leveraging
- Local Governments Pushing Tax Increases to Cover Pension Costs
- Primary Election Had High Voter Turnout
- State Water Board Releases Controversial River Flow-Sharing Plan
- PG&E Fire Liability Sparks Wall Street Field Trips
- Wealthy Taxpayers Heading for the Border
- “California Crazy”: New Book Shows Off Our Architectural Anomalies…Giant Doughnuts!!!
Capital News & Notes (CN&N) harvests California legislative and regulatory insights from dozens of media and official sources for the past week, tailored to your business and advocacy interests. Please feel free to forward.
Stay current daily! For our focused updates via Twitter: @jrgualco / @robertjgore / @gualcogroup
FOR THE WEEK ENDING JULY 13, 2018
READ ALL ABOUT IT!!
Final State Budget for 2018-19
Dept. of Finance full version and support detail:
California Secretary of State Alex Padilla assigned proposition numbers to 12 ballot measures that will go before voters in November. Here’s a breakdown of what will be on your ballot:
Prop 1: $4 billion bond measure for housing.
Prop 2: Allows counties to use money from Proposition 63’s “millionaire’s tax” on permanent housing for the homeless that includes a direct connection to social services.
Prop 3: $8.9 billion bond that would fund projects aimed at improving water quality, fixing dams and protecting habitats, among other things.
Prop 4: Authorizes $1.5 billion in bonds to build, expand, renovate and equip children’s hospitals.
Prop 5: Gives a property tax break to homeowners over 55 buying a home.
Prop 6: Repeals a $5 billion-a-year gasoline tax and fee increase the Democrat-controlled Legislature and Gov. Jerry Brown approved last year to repair California’s roads.
Prop 7: Overturns a 1949 voter-approved initiative called the Daylight Savings Time Act, which established Standard Pacific Time in California. If voters approve the ballot measure, the Legislature would then decide how the state’s time should be set.
Prop 8: Limits how much private outpatient kidney dialysis clinics could charge patients and requires them to report financial information to the state.
Prop 9: Divides California into three states.
Prop 10: Allows cities and counties to enact much more comprehensive rent control laws.
Prop 11: Requires workers at private emergency ambulance companies to remain on call during work breaks.
Prop 12: Establishes specific animal confinement/cage-free standards for egg-laying hens, breeding pigs and calves raised for veal.
In the two weeks since an initiative qualified that would repeal an increase to the gas tax, construction companies, labor groups and civic organizations have poured $3.7 million into a campaign against Proposition 6, campaign records show.
Although the total raised by supporters of the gas tax is $11.8 million, backers of the repeal initiative on the November ballot say they have raised more than $1 million in recent months, bringing their total haul to $3.2 million.
“Unions and the highway construction industry have their own stake here, given the $50-plus billion in road building and repair costs, and they are not about to roll over,” said Larry Gerston, professor emeritus of political science at San Jose State University. He said a reasonable expectation is that $50 million to $75 million will be raised for the Nov. 6 election “given the self-interest on both sides and the amount raised to date.”
The ballot measure would repeal an increase in the state gas tax and vehicle fees expected to raise more than $5 billion annually for road and bridge repairs and improving mass transit.
In the days after the initiative qualified on June 25, the campaign against the repeal received $1 million from a construction industry committee, the Southern California Partnership for Jobs, and $250,000 each from the California American Council of Engineering Companies PAC, Operating Engineers Local 3, and the construction companies Teichert Inc. and Bay City Paving and Grading.
That campaign also received $150,000 from the construction firm Myers and Sons, and $100,000 from the Associated General Contractors PAC. The League of California Cities has put $370,000 into the campaign, including contributions before the measure was officially qualified to be put before voters.
“I think the building trades and general contractors have a huge amount at stake, and will spend millions,” said Democratic political strategist Garry South, who noted that Gov. Jerry Brown, a major proponent of the gas tax, has $14 million he could spend on the issue stored in his own campaign accounts.
On the other side, congressional Republicans are expected to write big checks, as they did for the campaign to qualify the initiative, in hopes of spurring more conservative voter turnout to affect congressional races also on the November ballot. At stake is which party will control the U.S. House.
At the same time, former San Diego City Councilman Carl DeMaio, who heads a committee to repeal the gas tax, said that panel has raised $1.1 million from 25,000 donors, most giving $100 or less.
“With the support of thousands of small donors we can make our voice heard in a political system too often dominated by big money from a handful of powerful special interests,” DeMaio said in a statement.
Insurers, doctors and nurses are spending millions on lobbying and donations to lawmakers’ campaigns in the current legislative session, battling over costly large-scale changes as they await Gov. Jerry Brown’s successor.
Major health industry groups have spent more than $18 million on lobbying, according to an analysis by The Sacramento Bee, in an effort to kill or water down bills proposed to rein in rising health care costs and impose new regulatory requirements for insurers and health plans.
The spending, similar to levels in the prior legislative session, foreshadows a costly and thorny political debate in the years ahead. Democrats are seeking to protect coverage gains made under Obamacare, expand access to care for the low-income and undocumented, lower premium costs and blunt broader changes to the health care landscape pushed by the Trump administration that they see as a threat to their long-term goal of universal coverage.
Brown has resisted spending the money it would take to implement the changes. Assembly Democrats proposed 16 major health care bills after the leader of the Assembly shelved a bill out of the Senate that sought to create the nation’s first single-payer health care system, leading to a bruising political fight among lawmakers and health care groups. The budget Brown signed this month doesn’t include funding for the most far-reaching, high-dollar ideas.
But their agenda sets the stage for another push under a new governor, one aimed at undertaking major reductions in the overall cost of health care, imposing industry price controls, creating new government subsidies, improving the affordability of coverage and expanding access to those currently uninsured.
Lt. Gov. Gavin Newsom, the frontrunner in the governor’s race, has teed up his own prescription for what he sees as today’s most pressing problem in health care: rising costs. He has called for a new system that covers everyone regardless of immigration status or ability to pay, and for the state to begin analyzing whether a single-payer system would work to lower costs in the nation’s largest state.
“These are the makings of a big health care debate in Sacramento next year, with groups lined up on all sides of these issues, and a likely new governor who has taken a very public position,” said Larry Levitt, senior vice president of the Kaiser Family Foundation, a nonprofit health research organization not affiliated with Kaiser Permanente.
Should Newsom win, as polling suggests is likely in the heavily Democratic state, he will also contend with these forces. He has endorsements from the California Nurses Association and the California Medical Association, often on warring sides of the health care debate.
“In the last couple years, there’s been a lot of talk about dramatically remaking the health care system in California, so it certainly won’t be a surprise to see industry groups ramping up their advocacy and lobbying efforts,” Levitt said. “These are very big and powerful industries, including hospitals and providers and drug manufacturers and insurance companies.”
The six Democrats who this year put forward major proposals out of the Assembly have accepted sizable, and in some cases maxed-out, campaign contributions from health care industry groups opposed to major changes, according to a campaign finance analysis by The Bee and MapLight, a nonprofit research organization that tracks money in politics.
Assemblyman Joaquin Arambula, D-Fresno, and Assemblyman Jim Wood, D-Healdsburg, who led efforts in the Assembly to craft an alternative to the single-payer bill, accepted the largest amount in campaign contributions from health insurers, doctor and hospital groups and the pharmaceutical industry.
Arambula has taken more than $48,000 into his 2018 campaign account through the end of June, and Wood has accepted $45,000, according to the analysis.
The four other lawmakers — Assemblywoman Autumn Burke, D-Marina Del Rey, Assemblyman Ash Kalra, D-San Jose, Assemblyman David Chiu, D-San Francisco, and Assemblywoman Laura Friedman, D-Glendale — accepted $32,900, $18,800, $18,500 and $9,600, respectively.
The practice is common, and is one measure of the industry’s effort to influence California politicians. Health care activists complained that their proposals were too conservative and piecemeal. The lawmakers said they weren’t swayed by the money.
In fact, all six lawmakers also accepted campaign contributions from the California Nurses Association, which has denounced anything short of a government-run, taxpayer-financed single-payer system as an ineffective, incremental approach.
Most of the proposals are still moving through committees, but supporters question whether there is the political appetite to advance them to the governor’s desk this year — especially those that would incur ongoing costs to the state. Many are expected to be held in appropriations committees due to cost concerns. Assembly Democrats sought $1 billion to pay for their highest priorities as part of this year’s budget.
“We recognize that this is more about having policies ready for a new governor rather than the current governor,” said Anthony Wright, executive director of Health Access California, a Sacramento-based health consumer advocacy group that backed the proposals. “Anything that costs money that wasn’t included in the budget is not likely to happen this year.”
Brown did agree to spend $65 million on two measures. One requires by 2020 the state to maintain a database tracking payments to health care providers for patient treatments and procedures. Another will develop a “road-map” to a future single-payer-type system in California. It calls for a plan giving the Legislature and governor options by October 2021 for moving California toward a “unified financing system for all Californians.”
The most influential and well-funded health industry groups, among 20 that spent money lobbying on the 16 bills, are the California Medical Association and the California Hospital Association. They spent $5.7 million, according to the latest filings.
Much of their energy was aimed at fighting Assembly Bill 3087, by Kalra, which sought to control rising health care costs by giving the state more power to regulate prices. It drew out in full force the lobbying muscle of the industry, which stands to gain from higher prices.
“There is incredible resistance among those in the health care industry to give government more control over their prices…They will fight government price controls tooth-and-nail,” Levitt said. “They’re looking to protect their profits.”
In an interview at the Capitol last month, Kalra said he proposed the bill because he didn’t think the other measures put forward after Assembly Speaker Anthony Rendon shelved the single-payer bill went far enough.
“It’s critically important that we do something about cost containment,” Kalra said. “This issue is not going anywhere. Costs aren’t going down, and those that have benefited from the rise in health care costs have to come to the table to be part of the conversation, so we can achieve a sustainable system.”
Janus Norman, chief lobbyist for the California Medical Association, said killing the bill was the association’s main objective this year. He said the bill would have done little to lower overall health care costs and posed a threat to the ability of California to attract medical professionals in a state already experiencing a physician shortage.
“It would have been devastating,” Norman said. “It was our No. 1 priority this year.”
Kalra said he’ll push forward and won’t be affected by campaign money he gets from groups opposed to cost controls. He called the industry groups’ opposition a “badge of honor.”
But he also acknowledged their ability to influence decision-making in Sacramento, calling them “very powerful and very influential.”
“If they don’t want to see something happen, it’s unlikely to happen,” Kalra said. “My message to them is if we don’t create a sustainable system, it’s not going to be good for them or for Californians.” .
Special interests could put more money directly into the hands of California legislative leaders, giving them greater influence over campaigns, under a bill unveiled last week as lawmakers left Sacramento for summer recess.
Legislators also added provisions to the bill to require political parties to file more frequent and timely campaign finance reports with the state. They describe Assembly Bill 84 as a measure that increases transparency.
“The real strength of the bill is that we added a disclosure that doesn’t exist right now,” said Assemblyman Kevin Mullin, a South San Francisco Democrat who introduced the bill. “I do think it does strengthen leadership’s hand in getting good people elected and keeping them elected.”
In a typical election year, political parties are only required to file six financial disclosures, and 24-hour reports on contributions of $1,000 or more in the three months leading up to an election. AB 84 would require political parties to file monthly reports as well.
Political observers and advocates for campaign finance reform raised immediate concerns about the bill.
“Apparently there is more transparency, but the question is in exchange for what?” said Emelyn Rodriguez, a political and election law attorney and former senior counsel at the California Fair Political Practices Commission. “It looks like the exchange could be raising and spending larger or unlimited amounts from more sources and possibly including lobbyist and lobbying entities.”
The proposal would allow both Republican and Democratic leaders in the Senate and Assembly to open separate and new “legislative caucus committees.” The groups would be considered political party committees, which have more generous financial contribution limits than legislative candidates.
Under rules applied to the 2018 election cycle, candidates for the Senate and Assembly are limited to receiving $4,400 per election from individuals, businesses and campaign finance committees. Lawmakers are also barred from giving each other more than $4,400 per election. Political parties, on the other hand, can give candidates as much money as they want.
These new legislative caucus committees would be treated like political parties, which are capped at accepting $36,500 in contributions from each outside source per calendar year. The limit would only apply to contributions that the caucus committees spend on state candidates. There’s no limit to how much money an outside source could give the committees for other expenses.
The new law essentially allows corporate donors to give $73,000 more to each party – $36,500 to Senate Democrats and $36,500 to Assembly Democrats, for example – to fund candidate campaigns per year, said Emily Rusch, the executive director of California Public Interest Research Group.
“Rules that allow these really large contributions end up reducing the influence of average Californians in the process,” Rusch said. “Democracy should be for all of us, not the very few.”
Supporters of the bill point out that outside interests are already allowed to give $36,500 in contributions per year to every county-level Republican and Democratic political party in California, as well as the state parties, but typically do not. Mullin said he expects the bill will simply slice up the fundraising pie differently, instead of inserting more corporate money into state politics.
Under current practice in California, county party committees funnel money to the state party. The state party hands out contributions to candidates that receive its endorsements. If the party fails to endorse a candidate in the race, it does not spend money on that seat.
The new legislative caucus committee structure would allow Assembly Speaker Anthony Rendon, Senate Pro Tem Toni Atkins, Senate Minority Leader Pat Bates and Assembly Minority Leader Brian Dahle, and their successors, to spend money on races in which the party has not made an endorsement. AB 84 could also help legislative leaders protect members under fire from party activists.
“I would like to see the bill amended so that money is not given to incumbents that contradict the core values and platform of the party to whom that incumbent belongs,” said RL Miller, head of the California Democratic Party’s environmental caucus and the leader of the grassroots organization Climate Hawks Vote.
When Darrell Steinberg pushed through a new process in 2014 to allow advocates to pull initiatives from the ballot, he had no way way of knowing he’d be dealing with it this year as mayor of Sacramento.
The former Senate president pro tem found himself in a bind when soda companies qualified an initiative that would make it more difficult for local governments to create new taxes.
After a series of negotiations, soda companies and lawmakers reached an agreement to pass a bill banning new local soda taxes through 2030. In exchange, the soda companies agreed to pull their initiative from the November ballot.
The change to the initiative process was designed to promote compromise between lawmakers and initiative proponents — two groups Steinberg says seldom compromised before his 2014 bill was passed.
“The law now provides more choices for those who are making public policy, and I think that’s a good and healthy thing,” Steinberg said.
But lawmakers from both major political parties feel their hands are being tied at the last second to rush bills through the Assembly and Senate.
Assemblyman Evan Low, D-Campbell, said “the initiative process has completely been abused and turned California into a circus.”
State Sen. Jim Neilsen R-Gerber, criticized the closed-door negotiations that took place on a consumer privacy initiative that has since been withdrawn after lawmakers passed a bill expanding consumer protections. Hours before he ultimately voted in favor of the bill, Nielsen called it “something that the majority of legislators will know nothing about.”
While Steinberg acknowledges no political process is perfect, he insists it is better than an “all-or-nothing approach that existed before.” He added that lawmakers tend to wait until the last second to strike a deal with initiative proponents, thus rushing the voting process.
“Deadlines tend to focus the mind here,” Steinberg said.
In 2016 — the first time the new initiative process went into effect — two initiatives were withdrawn. This year, three were pulled.
Commentary from CalMatters
California’s economy may be booming, but throughout the state, local governments—including school districts—are feeling the financial pinch and asking their voters to approve new taxes of one kind or another.
There were 111 local tax measures on the June primary election ballot, the vast majority of which passed, according to municipal finance guru Michael Coleman of CaliforniaCityFinance.com.
Dozens more—sales taxes, parcel taxes, marijuana taxes, utility taxes and hotel taxes—are being planned for the Nov. 6 general election.
So why are so many local entities feeling strapped?
Local officials will tell you, if you don’t quote them by name, that it’s mostly because their mandatory payments into the state’s two big pension funds are soaring.
The California Public Employees Retirement System (CalPERS) and the California State Teachers Retirement System (CalSTRS) lost tens of billions of dollars during the recession a decade ago and have never fully recovered.
CalPERS has steadily and sharply increased financial demands from cities, counties and school districts for their civil service workers while the Legislature and Gov. Jerry Brown cranked up contributions to CalSTRS from school systems to cover teacher pensions.
However, while seeking more money from their voters to cover their ever-increasing retirement costs, local officials have been very reluctant to say it’s for pensions, fearing backlash at the polls. Rather, on the advice of high-priced “consultants,” they promise the new taxes will enhance such popular services as police and fire protection and parks.
We can expect more such propaganda this fall, leading up to the election.
One example is in Sacramento, whose mayor, Darrell Steinberg, wants his voters to reauthorize a half-cent sales tax that will soon expire and to add another half-cent.
In a recent speech, he called his proposal “a real game changer” that would finance affordable housing, shelters and services for the homeless, job training in low-income communities and small-business incentives.
However, simple arithmetic tells us otherwise. The additional half-cent of sales tax would generate less than $40 million a year, city budget documents say, while by the city’s own estimate, its mandatory payments to CalPERS are expected to increase from $81.6 million a year to $129 million by 2023.
To its credit, the Sacramento Bee pointed out the looming effect of the city’s rising pension costs. The state’s other news media should follow suit as their local officials tout the benefits of increasing taxes. Reporters can easily calculate projected pension cost increases from CalPERS data and the potential revenues from sales tax data.
Meanwhile, one city just a half-hour’s drive from Sacramento is doing it the right way, telling voters why it needs more money.
Lodi also will place a half-cent sales tax increase on the November ballot and its officials are not shy about the reason.
Lodi City Manager Steve Schwabauer has been a leading figure in efforts to persuade CalPERS to moderate its demands, arguing that cities such as his will face insolvency unless they get relief or persuade voters to raise taxes.
Schwabauer told the city council, before it voted unanimously to ask voters for the tax hike, that without it the city will see operating deficits beginning next year.
“The cause of this, point-blank, is CalPERS and our pension fund, and I have spent at least two years of my life fighting with CalPERS,” Councilwoman JoAnne Mounce said.
Such candor may not make it easier to persuade voters, but it’s the right thing to do.
Turnout among registered voters jumped to 37 percent this year — California’s highest rate in a non-presidential primary since 1998 — stoking excitement about a more enthused electorate in 2018.
Officials said the numbers are impressive, because California previously saw a decrease in voter turnout in four consecutive non-presidential election year primaries, culminating in a historic low of 25 percent in 2014.
But political consultant Paul Mitchell worries people are overstating the importance of the 37 percent turnout rate and Trump’s ability to drive voters to the polls.
Mitchell said the numbers belong in a larger historical context: The baseline turnout in a gubernatorial primary is 34 percent. He called this year’s results “just slightly better than average.”
“When you look at past primaries with open gubernatorial primaries, this is dead even,” Mitchell said.
California water officials released a plan to increase flows through a major central California river, an effort that would save salmon and other fish but deliver less water to farmers in the state’s agricultural heartland.
It’s the latest development in California’s long-running feud between environmental and agricultural interests and is likely to spark lawsuits.
“The State Water Resources Control Board’s decision today is the first shot fired in the next chapter of California’s water wars,” warned Democratic Assemblyman Adam Gray of Merced, who represents San Joaquin Valley communities that rely on diversion from the river for water supply.
Board chairwoman Felicia Marcus pitched it as a plan to prevent an ecological crisis. John McManus, president of the Golden Gate Salmon Association, said the plan is critical to restoring California’s nearly decimated native salmon population, a boon to fishing families and communities.
The plan applies to the lower San Joaquin River, three of its tributaries and the southern end of the Sacramento-San Joaquin River Delta. The delta is home to many threatened fish species and provides water for vast swaths of farmland and the majority of California’s people.
State standards last updated in 1995 allow for up to 80 percent of the water from the lower San Joaquin River and its tributaries to be diverted for agricultural and other uses. The new plan would double that, requiring 40 percent of the water to flow unimpaired, with a range of 30 to 50 percent between February and June.
The change is designed to protect salmon by mimicking natural water flows that fish respond to, the board said in its report. Some fishing groups wanted it to go even farther.
The advocacy group Trout Unlimited advocated for a target closer to 60 percent. The plan lacks key details about how water managers will measure outcomes for fish and determine water flows throughout the year, said Chandra Ferrari, a senior policy adviser.
“It’s very hard to look at that plan and say, ‘Yes, that’s going to protect the fish,’ because it just doesn’t have the detail that’s required to get there,” she said.
But farm groups argue that lessening water diversion will deliver a major blow to the economy and cost thousands of jobs in the San Joaquin Valley. It not only will decrease water sent to farmers in some years but significantly increase the year-to-year variation, making it difficult for growers and food processors to make long-term plans, said Mike Wade, executive director of the California Farm Water Coalition.
“Simply dumping more water down the river with the hope that it will solve the Delta’s water issues is an incomplete solution to a complex set of problems,” Wade said.
Gray, who represents the San Joaquin Valley, said it will also hurt communities that rely on river diversion for their water supply. Overflow from agricultural irrigation helps supply the ground water that the majority of his constituents rely on for drinking water.
In a blistering statement, he said the “fish first philosophy will decimate or region” and further charged it is not “environmentally friendly to sacrifice the health of one environment for another.”
The water board is now taking public comment and will finalize the plan in August.
Wall Street types including Citigroup, Mizuho Financial Group Inc. and Columbia Threadneedle Investments have been descending upon Sacramento in droves to gain insight for clients and themselves. On a recent day, legislative staffers at the capital pointed to business cards piling up on their desks from investors and analysts.
To understand why they’re making the trip, consider this: In a single day, PG&E saw $3.5 billion of market capitalization vanish as California began probing its equipment as the cause of the deadly Wine Country blazes in October. It has since lost $6.3 billion more. Edison has seen more than $4 billion in value wiped out by similar investigations. PG&E’s stock hasn’t been this volatile since the financial crisis, data compiled by Bloomberg show.
“For an issue that is so hugely important,” said Praful Mehta, the Citigroup analyst who led its recent California trip, “it’s critical to do on-the-ground diligence.”
The relationships they’re building in the capital are about to pay dividends. PG&E has been leading the fight in Sacramento to kill a law known as “inverse condemnation.” It holds utilities liable for wildfire damages if their equipment is found to be the cause — even if they weren’t negligent. California Governor Jerry Brown and legislators formed a committee last week to weigh changes in how the state regulates utilities when it comes to wildfires. The panel’s widely expected to tackle this law as part of that broader mandate.
If California ultimately holds PG&E responsible for the deadly blazes that broke out across Napa Valley in October, the company could face as much as $17 billion in liabilities, based on JPMorgan Chase & Co. estimates.
Paul Fremont, a New York-based utility analyst for Mizuho Securities USA, was among those who traveled to California to glean more insight from legislators on what the future holds for PG&E and Edison. He spent three days in meetings and distributed a note to clients after his trip about the ways California’s legislature could end up helping utilities mitigate their exposure.
“Our motivation was to just better understand what to expect in California in the future,” Fremont said. “To get a full picture, you need to basically be on top of this issue and you need to understand the various points of view.”
Mehta and his team spent about three hours jumping from one meeting to the next in Sacramento. “You can have a good conversation with them, which is tougher over the phone,” he said of the visit. “You get to see body language and their reaction to different questions.”
Assemblymember Autumn Burke, a Democrat from Marina del Rey, said she was among the legislators who’ve met with firms looking for a better understanding of how the state’s actions may affect their investments.
“We’ve had the gamut, some from New York and some from not as far away,” Burke said in a phone interview. Given their investments, she said, “it’s not surprising that they would come here and see what’s going on. I wouldn’t expect anything less.”
California lost a very small but statistically significant percentage of high-income residents after voters approved Proposition 30 — the 2012 ballot measure that raised the top state income tax rate to 13.3 percent, the highest in the nation — according to a new working paper from three researchers.
The state lost an estimated 138 high-income individuals, or about 0.04 percent of the roughly 312,000 people subject to the tax increase, said co-author Charles Varner, associate director of the Stanford Center on Poverty and Inequality.
The research comes at a time when more Californians are at least threatening to leave the state because of high taxes and housing costs. The rumblings have escalated since the federal tax law that passed in December capped the previously unlimited federal itemized deduction for state and local taxes at $10,000.
“It remains to be seen what kind of effect (that change) might have, and we will be looking at that as the numbers come in,” said Varner, adding that he expects any effect on migration to be small.
The new paper updates a study on migrating millionaires that Varner and Stanford sociology Professor Cristobal Young published in 2012. That report looked at the movement of millionaires into and out of California after voters in 2004 approved a 1 percent tax on income over $1 million to fund mental health services.
Contrary to expectations, they found that the net migration of millionaires into California — millionaires moving in minus those moving out — increased slightly after that tax increase.
“In other words, the highest-income Californians were less likely to leave the state after the millionaire tax was passed,” their report said.
The tax increase approved in November 2012, however, was much larger than the mental health surcharge.
“One reason we wanted to update our previous paper is that this tax change in 2012 is the largest state tax change that we have seen in the U.S. for the last three decades,” Varner said.
For singles, Prop. 30 raised the rate by one percentage point on income between $250,000 and $300,000; by two points on income between $300,000 and $500,000; and by three points on income over $500,000. The income thresholds are doubled for married couples and indexed to inflation.
This brought California’s top rate, including the mental health tax, to 13.3 percent. (These increases were supposed to expire in 2019, but in 2016 voters extended them to 2030.)
The new working paper looked at taxpayers who were and were not subject to those rate hikes and found that in the two years before the increase (2011 and 2012), net in-migration for both groups “was positive and roughly constant.”
However, after 2012, net in-migration declined for those facing an effective tax increase of 0.5 percent or higher. The drop was largest for the group facing the highest effective tax increase, wrote the authors, who included Allen Prohofsky of the California Franchise Tax Board.
They noted that domestic migration accounts for a tiny portion of the change in the state’s millionaire ranks. That population fluctuates by more than 10,000 people from year to year, and migration accounts for 50 to 120 people, or about 1 percent. The remaining 99 percent “is due to income dynamics at the top — California residents growing into the millionaire bracket, or falling out of it again.”
The millionaire population is highly correlated to the financial markets. The researchers found that the median person who earned at least $1 million in a given year earned at least $1 million in only seven of the 13 years before and after that year.
That could be one reason people don’t pull up stakes after a tax increase. Another reason: It’s hard to move when you have a high-paying job, a spouse who may work and kids. The report found that married people with children are less sensitive to the tax increase than married people without children.
One thing that tends to make people of all income levels leave the state is divorce.
“In the year of divorce, the migration rate (for all taxpayers) more than doubles, and remains slightly elevated for two years after the event,” the report said.
The “core question” of both studies “is whether raising taxes on the rich reduces their net migration into the state,” the paper said.
Although the first study showed a counterintuitive result (more rich people coming than leaving), after the 2012 tax increase, “we observe a statistically significant effect in the expected direction,” albeit a small one, the authors wrote. “We estimate that California lost 0.04 percent of its top earner population over the two years following the tax change.”
The latter result was “consistent with what we found” in a 2011 study that examined the migration response to a tax increase in New Jersey, which raised its top rate by 2.6 percentage points, Varner said.
This year, Massachusetts voters will decide whether to increase its tax on income over $1 million by 4 percentage points. Its current rate is 5.1 percent.
The Pioneer Institute, a free-market think tank in Massachusetts, published a paper citing eight reasons why it thinks Young and Varner’s previous paper underestimates millionaire migration. Young published a rebuttal to those assertions.
Among other things, Young noted that only 11 percent of millionaires in the study made their money primarily from capital gains and that most “are the working rich.” He found no difference in tax flight among the two groups but is still doing research on capital gains.
“What we found is that net migration of millionaires to California was positive over the whole period we studied,” from 2007 to 2014, Varner said. “This suggests that the state has consistently become a more attractive place for top income earners to live.”
That echoes the results of another recent study conducted by Beacon Economics for San Francisco think tank Next 10. It tried to explain why California lost nearly 1.1 million more people to other states than it gained between 2006 and 2016.
It concluded that “the main driver for net out-migration appears to be high housing costs,” not high state income taxes. That’s because the “vast majority of people who moved out of California were concentrated in lower-skilled, lower-paying fields.” People moving out probably paid little or no state income tax because California’s tax structure is highly progressive, it said.
A new book has been published that charts unique buildings and quirky roadside attractions that have been built throughout the years in the state of California. From an ice-cream stand shaped like a giant owl to a drive-in topped with a gargantuan donut, California Crazy presents “architectural anomalies” that were designed to draw in passing drivers for snacks, provisions, souvenirs or a quick meal during the days when the automobile industry began to boom in the US.