The State of California Has Decided to Raise the Income Tax Rate for Its Residents

The State of California has quietly raised its marginal income tax rate to 14.4% beginning in 2024. Last week, Governor Gavin Newsom signed legislation that implements the change. In a recent op-ed, a Wall Street Journal writer noted:

…in 2024 California’s top marginal tax rate will increase to 14.4% from 13.3% for workers making more than $1 million. Those making between $61,214 and $312,686 would pay 10.4%. So California’s upper-middle class will pay more than millionaires in almost every state save New York, New Jersey and Hawaii.

The bill – SB 951 – is primarily designed to fund an expansion of the Golden State’s paid family leave benefit. It removes the existing $145,600 wage cap on the state’s 1.1% employee payroll tax. Right now, employees are eligible for a 60% to 70% wage replacement for up to eight weeks to care for a new baby or an ailing family member. As of 2025, the majority of California workers will be allowed to take home between 70% and 90% of their normal wages, with low-income families eligible for even more.

How will the tax increase affect the economy and the taxpayers?

The tax increase has sparked a debate over its economic and social implications. Proponents, such as Newsom, argue that the tax increase is a necessary and progressive way to support workers and families, especially those who are low-income, women, and people of color. They also claim that the tax increase will not drive away wealthy taxpayers, as California offers many benefits and opportunities that outweigh the higher tax burden.

Opponents, however, contend that the tax increase is excessive and unfair, as it targets high earners who will not see much, if any, benefit from the paid family leave expansion. They also warn that the tax increase will harm the state’s economic competitiveness and growth, as it will discourage investment, innovation, and entrepreneurship. They point out that California already has the highest income tax rate in the nation, and that many neighboring states have much lower or no income tax at all.

What are the alternatives and the future prospects?

The tax increase is not the only proposal to raise taxes in California. A pending ballot measure, Proposition 30, would add a new 1.75% surcharge on income above $2 million, bringing the top marginal rate on wage income to 16.15% (and 15.05% on non-employment income). Additionally, Newsom is proposing a windfall profits tax on businesses that have seen a surge in profits during the pandemic.

These proposals face uncertain prospects, as they require voter approval or legislative support. They also face opposition from various groups, such as business associations, taxpayer advocates, and some Democrats. Some critics suggest that instead of raising taxes, the state should use its record surplus to fund its priorities, or reform its spending and tax structure to make it more efficient and equitable.

Conclusion

The State of California has decided to raise the income tax rate for its residents in 2024, as part of a bill to expand the paid family leave benefit. The tax increase has generated controversy, as it affects different income groups and sectors differently, and has potential impacts on the state’s economy and society. The tax increase is also not the only tax hike on the horizon, as other proposals are being considered or advanced. The future of California’s tax policy will depend on the outcome of these proposals, as well as the preferences and behavior of the voters and the taxpayers.

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