The celebration of Democrats is on hold after the election results. Joe Biden is headed to the White House, but defeats in both chambers of Congress slowed the extreme agenda of packing the Supreme Court, adding new states to the union, and levying a confiscatory wealth tax. Such broad losses for Democrats most likely mean that radical policy prescriptions will now only stand a chance at the local level.
That is what happened in San Francisco, where voters passed a wealth tax beyond efforts for the state or federal level. It is described as an “overpaid executive tax” which would apply to those firms in the city which pay their officers more than 100 times the median worker salary. While decisions on whether to enact tax hikes are best left to local residents instead of to the bureaucrats in Sacramento or the District of Columbia, the new wealth tax in San Francisco could now create unintended negative effects, including a significant exodus of rich earners who move out of the city.
The Bay Area is home to the widest income gap in California. Those local residents in the top 90th percentile earned over 12 times more than those local residents in the bottom 10th percentile. The combination of historic market policies and current socialist policies established such separation of classes in the state. The success of the technology industry in tandem with high tax rates and building restrictions created this situation where someone could earn over $100,000 a year and live in his car.
The new wealth tax could not come at a worse time. With the coronavirus mandates and an economic downturn, the San Francisco Gate wrote on a “mad dash” for rich earners to leave the city. The number of homes on the market doubled from last year. It went so bad that the San Francisco Gate hired a Bay Area exodus reporter who then also left the city. Similar fiscal moves like a doubled transfer tax on valuable real estate and a significant increase in business taxes, will further accelerate the exodus.
Recent events indicate that a high tax rate will likely reduce the income gap only by chasing rich earners away. Such a population crisis will only worsen as it becomes more difficult to own property or run a business in San Francisco. There is a steady stream of companies which could move from the city altogether. Tesla is likely headed out of the Bay Area, and so are several venture capital firms, as well as technology workers at Twitter and Google. When companies do not feel welcome anymore and already have remote workers, the results are obvious and disastrous.
The ripple effects of the new wealth tax may also hurt blue collar workers and service industry workers in the future. This is because local revenues for basic services, social programs, and infrastructure would be hollowed out if rich earners continue to leave and take their capital elsewhere. They will move to places with more jobs or to where they can create them. This could create advantages for workers in Austin or Denver to the detriment of low income and middle income workers in San Francisco.
San Francisco leaders would be wise to learn from the places with similar tax schemes. The exorbitant state and local tax rates in New York sparked a large exodus earlier this year. Some communities had nearly 40 percent of their own residents leave and take their billions of dollars in wealth with them. The country of France overturned its wealth tax after it found that it chased away some 42,000 millionaires from 2000 and 2012.
There are other solutions to close the severe income gap in San Francisco. The state and local tax deduction limit is one of the critical means to even the playing field between the classes without raising the statutory income tax rate. When the city is faced with a litter of drug needles, rapidly rising crime, and stress from the pandemic, another punitive tax may be a signal for rich earners that they are not elite anymore. For a city that is so proud of and reliant on the technology sector, more of such dire ballot initiatives may soon spark another economic disaster of the first order.
Kristin Tate is a libertarian author and an analyst for Young Americans for Liberty. She is a Robert Novak journalism fellow at the Fund for American Studies. Her newest book is “The Liberal Invasion of Red State America.”