The Federal government and many states are looking to America’s richest to help alleviate the many budget deficits. If President Obama’s proposed budget and California’s Millionaires Tax initiative are passed California’s highest earners could be paying 54.9% in income taxes.
Earlier this month, President Obama released his proposed budget for fiscal year 2013. Included in the President’s proposal is a return to the 2001 tax brackets for the two highest income groups. The 36 percent and 39.6 percent rates would apply to taxpayers earning more than $250,000.
California also has three different initiatives aiming to appear on the November ballot that would increase income tax rates by various amounts, with two initiatives specifically targeting millionaires. The passage of any of these initiatives would move California’s highest tax bracket, currently 10.3 percent, above Hawaii, who currently has the highest tax bracket at 11 percent.
California’s Millionaire Tax to Restore Funding for Education and Essential Services Act of 2012 seeks to increase the tax rate for taxpayers earning more than $1 million by three percent and taxpayers earning over $2 million by five percent, making California’s highest tax bracket 15.3 percent. The tax increases would last for 12 years.
The revenue generated from the additional taxes would be used to fund public schools as well as senior and social services.
This 15.3 percent income tax rate, in addition to the proposed highest Federal income tax rate, 39.6 percent, could subject California high-net worth taxpayers to an income tax rate of 54.9 percent on any income over $2 million.
Progressive Tax Rate
Both the Federal and California tax income progressively, meaning that not all income a taxpayer earns is taxed at the highest rate. For all taxpayers, the first portion of income is taxed at the lowest rate and then higher rates are applied for additional income. For this reason, only income over $2 million would be subject to a 54.9 percent income tax rate.
For example, under the current Federal and state tax rates a person earning $2 million dollars would pay $677,314 for Federal taxes and $191,295 in California taxes, without any credits, deductions or exemptions. That is a total of $868,609 on $2 million or a tax rate of 43.4 percent.