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 23000
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.

Jon Coupal is President of the Howard Jarvis Taxpayers Association
— California’s largest taxpayer organization — which is dedicated
to the protection of Proposition 13 and promoting taxpayers’ rights.