California Court Upholds 1% Tax on Millionaires

Last Wednesday, the California Court of Appeals ruled on Jensen v. California Franchise Tax Board, and rejected challenges to Proposition 63. For those of you who are not familiar, the proposition imposed a 1% tax on California taxpayers who earn more then a million dollars per year to fund mental health services. You can check out the following highlights of the ruling courtesy of the Tax Prof, or download the full text here.

We find no constitutional infirmity in the challenged portions of Proposition 63. An income tax may be rationally based on a taxpayer‟s income level and ability to pay, and there is no need to show that a particular taxpayer personally benefits from a tax assessed for the public good. Taxpayers earning more than $1 million annually do not comprise a “suspect class” requiring a strict scrutiny constitutional analysis. Further, Proposition 63 is valid even if it is not a constitutional amendment. ...

We are unaware of any case authority holding that wealthy individuals form a “suspect class” deserving of a heightened degree of scrutiny. Suspect classifications include race, gender, national origin or illegitimacy. Wealth generally confers benefits, and does not require the special protections afforded to suspect classes. Wealth has “none of the traditional indicia of suspectness: the class is not saddled with such disabilities, or subjected to such a history of purposeful unequal treatment, or relegated to such a position of political powerlessness as to command extraordinary protection from the majoritarian political process.” (San Antonio School District v. Rodriguez, 411 U.S. 1, 28 (1973).) ...

The Taxpayers are mistaken in thinking that taxpayers in a particular tax bracket cannot be singled out for an income tax to benefit society at large. ...

The tax imposed by Proposition 63 is not arbitrary merely because a person earning $1,000,001 is subject to the tax, while a person earning $999,999 is exempt. The government has leeway in “drawing lines” below which individuals are exempt from a tax. ...

The Taxpayers perceive themselves as victims of a populist movement to “soak the rich.” The desire of the majority of the electorate to tax a minority of citizens based on their earnings is not a basis for overturning an income tax. The courts “do not substitute their social and economic beliefs” to supplant the judgment of the enacting body.

CA Court Rejects Lawsuit Against Tax Increases

There has been a lot of talk about the California budget here in my hometown of Sacramento. Recently, a State Legislator went a roundabout way of increasing the state’s revenue without needing a super majority vote to pass a tax increase. Almost immediately, anti-tax groups here in California filed motions with the Supreme Court. However, according to the Associated Press, the appeals court has rejected the motion:

A California appeals court has tossed out a lawsuit filed by anti-tax groups that sought to block a package of tax increases passed by Democrats in the state Legislature.

Citing separation of powers, the court ruled Wednesday it could not intervene because Gov. Arnold Schwarzenegger had not signed it into law.

Schwarzenegger eventually vetoed the $18 billion proposal to help close California's $42 billion budget deficit.

The lawsuit was filed by the Howard Jarvis Taxpayers Association, with support from most Republican state lawmakers.

They argued that the Democratic majority acted illegally when it passed the tax increases because it did so with a simple majority vote. The state Constitution requires a two-thirds majority for tax increases.