SAN FRANCISCO — If there’s anyplace in the country where rising tax rates should choke off an economic recovery, it’s California. On top of the federal tax hikes that kicked in last month, the state has just raised income taxes on its wealthiest residents to the highest levels in the nation, a move conservatives warn will drive millionaires and their companies to other states, taking jobs and growth with them.
The increases come as California’s economy continues a remarkable turnaround. A year ago, the state was a mess, with double-digit unemployment, a bottoming-out housing market and scary budget deficits. Now, hiring is up faster than the national average, and the housing market is regaining strength. Even the state budget is back in the black.
Where the nation’s highest earners live.
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What happens to the economy here over the next year will be a case study for policymakers in Washington, who are paralyzed over similar questions of taxation and growth. The early indications, in California, point toward an outcome you might not expect.
The tax increases approved in November are a big reason the state isn’t staring down another huge budget shortfall or the prospect of issuing IOUs to fill it. They include bumping the sales tax up slightly and raising the top income tax rate to 13.3 percent, which is four percentage points higher than the District of Columbia’s and more than double the rate in Virginia or Maryland.
Yet many economists and some young executives in the state say they don’t worry about that high rate chilling growth. Other factors loom much larger for California’s business and economic health, they say, including whether the state can maintain deep pools of highly skilled talent and, in complicated but important ways, the renewed upward march of home prices in the Bay Area and beyond.
“I don’t think we should be surprised that the state is growing, nor that California is growing faster than the national economy,” said Christopher Thornberg, an economist and the founding partner of Beacon Economics.
Thornberg gives forecasting presentations to private and civic groups around the state. He projects that even with the tax increases, the state is poised for strong growth in the coming year and is poised to add, not lose, job creators. “In a couple of years in California,” he said, “we’re going to have the problem that we don’t have enough housing, and housing’s too expensive.”
California is the largest state economy; if it were its own country, the state would rank among the top-10 world economies. The state often fares worse in recessions than the rest of the nation, and the Great Recession fit the pattern. Housing prices collapsed in the Central Valley and Southern California’s Inland Empire, leaving hundreds of thousands of families in foreclosure and millions owing more on their mortgages than their homes were worth. The state lost more than a third of its construction jobs. Unemployment peaked above 12 percent.
Unemployment is still 9.8 percent in California, two percentage points above the national rate. But by all indications, the state economy has improved rapidly during the past year. California’s unemployment fell by 1.4 percentage points in 2012, compared with a 0.7 percentage point drop for the country as a whole.
