Martin Hutchison writing at Money Morning:
California Governor Jerry Brown is at it again.
He's cut a deal with the teachers' unions that would take the top rate of state income tax from 10.3% to 13.3%.
If passed on the November ballot, that would increase taxes on the top tier by a hefty 29%.
Since that would be the highest rate in the nation, it begs the question: How high would taxes have to go before Silicon Valley's zillionaires decided to make the great escape?
It's a very important question considering the condition of California's state budget.
After all, the Facebook IPO alone is expected to produce $2.5 billion in state tax revenue over the next five years. What if high tax rates set in motion the law of unintended consequences?
Like in the late 1990s when dot-com revenues enabled the state to go on a massive spending spree.
Not long after the tech bubble burst, the sudden budget crunch that followed in 2001-02 caused Governor Gray Davis to be recalled in a referendum.
It's a different set up this time, but the results could be the same.
Higher Taxes Create Capital Flight
Silicon Valley's tech sector provides both capital gains taxes from tech giants selling their stakes after companies go public and massive income tax revenues from their salaries and bonuses in the interim.
Faced with higher taxes the threat of relocation is very real - even among large, well-established companies. For instance, Boeing (NYSE: BA) relocated from Seattle to Chicago in 2001.
California's taxes and other living costs are already large enough to cause flight; in 2007-10 an annual average of 135,000 more people left California than arrived there.
However, the largest generators of California's tax base are not established companies, they are the young, brilliant entrepreneurs, venture capitalists and engineers involved in Silicon Valley enterprises.
These people are exceptionally footloose, with few family ties.
On the plus side, Silicon Valley is very tightly networked, so at least the more junior members of the tech sector would be tied there by their colleagues, competitors and mentors.
Still, the corollary of the Valley's networked nature is that the departure of a small number of key people could cause a mass exodus, with junior employees following their bosses and mentors....MORE
