The Problem with Taxing the Rich: You Have to Catch Them First

Oregon — Taxing the rich long has been a popular campaign theme. Two West Coast efforts, one via ballot in California and one via the Legislature in Washington, are testing just how far progressives can push the tax-the-rich mantra without it backfiring. Early results suggest not nearly as far as they would like.

A quick recap of what the states are attempting:

The Washington Legislature this month approved a new income tax on residents making more than $1 million, a maneuver that is particularly significant in Washington because the state has no income tax and has constitutional language that virtually ensures the new tax will be challenged. When this article was written, Gov. Bob Ferguson had not signed the bill authorizing the Washington tax, but he is expected to do so before the April 4 deadline.

California’s tax-the-rich scheme is even more controversial. Unions, with the support of Sen. Bernie Sanders (Democratic Socialist, Vermont) and other national politicians, are proposing a ballot initiative to institute a one-time 5 percent tax on billionaires in the state. The proposed tax has not qualified for the ballot. It also is set up to be retroactive, applying to anyone who was a resident Jan. 1 of this year no matter when it is enacted.

While neither proposal has become law yet – and California’s effort faces significant hurdles – both taxes already have created national political and economic ripple effects. The most tangible action spurred by the bill has been the relocation of high-profile billionaires from California and Washington to more tax friendly states.

Billionaires who have left California, according to multiple news reports, included Google co-founders Larry Page and Sergey Brin, Meta (Facebook) founder Mark Zuckerberg, Uber co-founder Travis Kalanick, venture capitalist Peter Thiel and subprime loan titan Don Hankey. The exodus from Washington includes Amazon founder Jeff Bezos and Starbucks founder Howard Schultz as well as several less well-known wealthy residents.

These new efforts to tax the rich temporarily have taken the focus off Oregon, but Oregon is losing a chunk of its wealthiest residents, too. In fact, more residents of Oregon (percentage-wise) probably have tax-driven incentives to move than in California or Washington because Oregon starts imposing punitive taxes, in particular a wealth/estate tax that starts at a mere $1 million, at a much lower income level than the Washington and California measures.

Washington’s tax would apply only to those who earned $1 million in a year, not anyone who accumulated that much over a lifetime. California is only going after billionaires – this time.

The reaction to the taxes before they even become reality reveal some realities of taxation that state governments on the West Coast for too long have ignored.

Tax policy is best handled at the national level. That’s not always possible. Local governments have to get money somewhere to pay for roads, schools, law enforcement and other necessities. But states compete with each other for businesses and residents. It’s expensive to move and it’s hard to sever relationships with family, employees and customers. But everyone (business or individual) has a price at which it doesn’t make sense to pay.

Moving is relatively easy for the rich. The biggest problem with taxing the rich at the state level is that they can afford to move. Likewise, many of the fastest growing businesses are technology and professional-services businesses with much less invested in physical infrastructure than old-school manufacturers like Boeing. Add to that the increased willingness of businesses to allow employees to work from home and it’s probably never been easier to move a business.

Tax increases are an easier sell if the people paying them receive something of value in return. That’s why local school bond and law enforcement measures typically have been the easiest to pass, though voters’ acceptance of even those bread-and-butter taxes is declining. The billionaire/millionaire taxes are being sold to voters based on the notion that the wealthy have more money than they need and should be paying for other people’s needs. That’s easy to believe if you aren’t affected by the taxes. But, should anyone be surprised that the targets of these taxes have reacted quite negatively?

Trust in government is a required foundation for taxation. If you are going to raise taxes, the people paying the taxes at the least need to trust that government will use the money to solve legitimate problems. Governments in Wast Coast states have been nuking what little trust they still had with voters. At the start of the year Portland had more than $100 million in unspent homeless funds – and not because the problem has been solved. Questions also linger over the city’s controversial arts tax. That’s pennies compared with the $15 billion-plus California has spent on a high-speed rail project that is nowhere near completion and is unlikely to ever deliver on its promise of connecting Los Angeles and San Francisco. In Washington, King County is involved in controversy over the mishandling of tens of millions of dollars of grant money.

Hopefully Oregon’s leaders are watching what’s happening in California and Washington. West Coast tax policies are shifting the migration map. There was a time when Oregon benefited from people leaving California and when Oregonians trying to lower their taxes just moved across the state line to Washington. Now, Idaho and Nevada are becoming preferred destinations for mere millionaires who want to stay in the West, while Florida and Texas seem to be the most likely destination for high-profile billionaires.

It’s too early to know the exact fiscal effects of wealth flight. Will it completely offset revenue increases from the higher taxes? Probably not in the short term. But it seems certain that the tax increases will produce far less revenue than proponents hope. And the long-term economic impacts of decreased job creation could be greater than the short-term revenue consequences.

Reposted with Permission from Oregon Roundup

A guest post by Mark Hester Mark worked 20 years at The Oregonian in positions including business editor & editorial writer. He is regular contributor to Oregon Roundup.

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