There is a perpetual debate in California political circles over whether the state’s highest-in-the-nation income tax rates encourage the wealthy to take themselves and their money elsewhere.
The debate intensified four years ago when Gov. Jerry Brown persuaded voters to temporarily increase the bite on the highest-income taxpayers, which raised billions of dollars and helped Brown close a yawning budget gap.
There is no shortage of anecdotal accounts that the tax hike encouraged some Californians to move to low- or no-tax jurisdictions, such as neighboring Nevada. But there is no solid evidence of mass migration.
It’s heating up again because voters will decide in November whether to extend the high-income surtax, or let it expire.
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Perhaps those affected were willing to tolerate a relatively brief period of higher taxes to help the state climb out of a hole, some argue, but a semi-permanent increase, pushing their combined federal-state marginal tax rate over 50 percent, could spark a flight.
If wealthy Californians want to flee the state, there is no question that Nevada is very willing to accept them – and will erect legal barricades to protect them from California’s notoriously aggressive tax collectors.
That is the underlying theme of Tuesday’s U.S. Supreme Court decision upholding the legal spanking that Nevada Supreme Court administered to the California Franchise Tax Board for its quarter-century-long pursuit of taxes from one wealthy expatriate.
Gilbert Hyatt, a brilliant technology inventor, deliberately moved from California to Nevada in 1991 to avoid state income taxes on a series of patent royalty payments he knew he would receive.
The FTB claims he actually changed residences a year later and dunned him for what became more than $10 million in taxes, interest and penalties on his royalties.
Hyatt and the FTB have battled constantly, mostly in the courts. And one previous skirmish already had made it to the U.S. Supreme Court.
The latest case before the court was the state’s appeal of a Nevada Supreme Court ruling upholding a lower court jury’s finding that the FTB had harassed Hyatt unmercifully. The jury awarded Hyatt nearly $500 million, which the Nevada Supreme Court reduced to just $1 million as it rejected California’s attempt to claim sovereign immunity.
California took the issue to the U.S. Supreme Court, and in a divided decision, it also rejected the state’s sovereign immunity contention, although it reduced damages to $50,000 – Nevada’s limit for suits against public agencies.
Chief Justice John Roberts and Justice Clarence Thomas dissented, saying that the Nevada Supreme Court had a legal right to impose the $1 million judgment on California as compensation for its tax collectors’ over-the-top pursuit of Hyatt that included rummaging through his garbage and revealing private information.
The net effect of this case is that Californians can, in fact, move to other states without fearing the wrath of the state’s tax collectors. Whether another big tax bite will, in fact, result in such an exodus remains uncertain.