As the California governor and legislature are being forced to find new ways to cut fourteen billion dollars in order to balance the California budget, after Governor Jerry last week dropped plans to find ways to get four Republican legislators to back his tax extension, voters have come up with their solution.
A new poll released last week showed strong and bipartisan support for raising taxes on the wealthiest state residents – those making over $500,000 per year, according to the poll.
Overall, 78% of likely California voters support a 1 percent increase in the income tax rate for Californians earning more than $500,000 a year.
Broken down by party, even 60% of Republicans support the idea, with 89% of Democrats and 79% of non-affiliated voters.
Pollster Ben Tulchin told the San Francisco Chronicle last week, “There is a populist anger out there that cuts across all lines.”
“They see that these (state) service cuts would affect middle-class and lower-class people, and they want rich people to pay their fair share,” Mr. Tulchin added.
Lenny Goldberg, Davis resident and executive director of the California Tax Reform Association, told the Chronicle, “Those are the highest numbers I’ve ever seen. On a tax scale – that’s pretty much a perfect score.”
However, the idea has not been seriously considered. For one thing, it would take a two-thirds vote of the legislature, and Republicans in the legislature seem to be more anti-tax than Republican voters.
“Obviously, the people are getting frustrated with the minority party in the legislature,” said Gov. Jerry Brown’s spokesman Gil Duran. “Eventually, their voices will be heard.”
The Republican position can be summed up by the spokesperson for Assembly Minority Leader Connie Conway who simply stated, “Republicans are opposed to increasing taxes, regardless of who is paying them.”
While the plan is not likely to be attempted, something clearly must be done. The California Budget Project last week projected that the State of California will collect $41 billion less in tax revenues than “was assumed in projections made just before the bottom dropped out of the state’s economy – an amount that exceeds annual state spending on California’s public schools.”
With last week’s white flag raised by Jerry Brown, it is quite obvious that even with a strong majority in both houses of the legislature and the governorship, the state’s two-third structure makes it impossible to raise new revenues.
The result is that California, unless something changes, will have to find $14 billion more to cut. That means schools like DJUSD are facing not a $3 million deficit, but a $6 million deficit. Measure A will only cover half of that.
It means that there will be additional fee hikes at UC and CSU. It means that Community Colleges are becoming more exclusive.
It will also mean at some point that the state will start releasing criminals because it will have to cut money there as well, and to this point the criminal justice system has come away relatively unscathed.
The voters are going to have to decide which programs they want cut or whether they will have to reach further into their pocketbooks. It seems likely we will see tax initiatives on the ballot by the fall, whether put on by the legislature or the interest groups or even voters themselves. Whether they can pass is another question altogether.
—David M. Greenwald reporting
I am generally in favor of a progressive tax system but I would favor other mechanisms first–taxing internet sales (though there are legal issues there) and possibly putting a sales tax on services would be reasonably progressive and make more sense.
Raising the income tax causes a couple of problems:
1. Our tax system is already quite pro-cyclical–it goes up in good times and down in bad times–and this procyclicality has caused us a lot of problems. We already raise close to half of general fund revenues from income taxes in good times and that is the main reason for the procyclicality (esp on capital gains taxes.)
2. I am concerned that many wealthy individuals will claim their residence in Nevada or elsewhere. I know many people who do already. (They live in CA most of the time but claim residency at their home out of state.)
dmg: “Obviously, the people are getting frustrated with the minority party in the Legislature,” said Gov. Jerry Brown’s spokesman Gil Duran. “Eventually, their voices will be heard.”
Just more Republican bashing bc Brown has not been able to lead the state any better than the Governator. Brown had the opportunity to get things done had he agreed to pension reform at the same time he was dealing w budget reform. Now he has resorted to whining about the evil Republicans – a cop out for his lack of leadership. He has ways, from what I understand, to put the issue of tax extensions to the voters w/o Republican support – but he was determined to get political cover for his ideas and lost…
Dr. Wu: “2. I am concerned that many wealthy individuals will claim their residence in Nevada or elsewhere. I know many people who do already. (They live in CA most of the time but claim residency at their home out of state.)”
This is a very real possibility that the wealthy will be driven out of the state by an increase in their income tax, just as CA’s anti-business climate has driven business right out of the state. Those sorts of non-solutions have unintended consequences that have to be thought through carefully. If I remember rightly, when there was a federal luxury tax invoked on yachts – the result was a huge loss in jobs and the near destruction of an entire industry. The federal luxury tax on yachts was repealed as an unmitigated disaster.
[i]Yet even as their share of the nation’s total income has withered, the tax burden on the middle has grown. Today’s working and middle-class taxpayers are shelling out a bigger chunk of income in payroll taxes, sales taxes, and property taxes than thirty years ago. . . It’s just the opposite for super rich.
The top 1 percent’s share of national income has doubled over the past three decades (from 10 percent in 1981 to well over 20 percent now). The richest one-tenth of 1 percent’s share has tripled.[/i]
[Source: http://robertreich.org/ ]
The cut-off for that measly increase was close to 500,000. If anyone is idiot enough to move out of State because of a one-percent increase, let them go.
Neutral: “The cut-off for that measly increase was close to 500,000. If anyone is idiot enough to move out of State because of a one-percent increase, let them go.”
And if they go, there taxable income goes w them… and how is this going to solve the state’s fiscal problems?
[i]”The cut-off for that measly increase was close to 500,000. If anyone is idiot enough to move out of State because of a one-percent increase, let them go.”[/i]
Neutral, you are not. And you really don’t get it. When they go, they take with them all tax revenue they would otherwise contribute.
Let’s say you have someone making one dollar over $1M (that is their AGI… which is what they will pay their taxes on). Their CA tax is already 11% or $110,000. Now let’s add another percent and we get to 120,000. You can make the case that this is only another $10,000; but that misses the point that you have now caused $120,000 to be the factor in a cost-benefit decision for a couple of changes that will ensure less tax revenue results.
First, assuming this highly-taxed individual stays, he will be more motivated to find ways to shelter income from taxation. He has smarter people working for him than do the tax-and-spend politicians that make up these looter rules and try to enforce them, so he will likely be successful. Since the additional $10k has motivated him to pursue this, while he is at it, his tax and wealth accountant also finds ways for him to shelter more than $10k… so in the end, he reduces his tax payments after the government tried to collect more from him.
The other scenario is that he moves away to Nevada or Florida and CA loses all $110,000 of his tax contributions to the looters in this state.
Let’s also take the business that is thinking about locating in CA, but the new CEO calculates his tax bill and decides to locate in another state. Now we have a loss in tax revenue growth which is a factor in the budget calculations.
Two things to consider: One – CA already has one of the highest state income taxes, and we compete with other states for high wealth individuals and for businesses owned by high wealth individuals. Two – when it becomes more profitable to pursue tax avoidance than to build wealth, the smart people will do just that.
One last thing… this left media-fired populist anger over “the growing wage gap” ignores the fact that the number of wealthy have expanded significantly since 1960 when the top Federal tax rate was 90%. It is no wonder then that today the top 10% of income earners contribute 68% of Federal income tax revenue compared to about 40% in 1960. The reduction in top income tax rates increased the incentive to grow wealth, and as a result, it netted the country a greater share of it so the looters are able to take care of more moochers.
Note, that this conservative is starting to warm up to taxing Internet sales… not because I support tax increases, but because of competitive fairness.
Use taxes are stupid, onerous, and inefficent. Most people do not pay them and the FTB cannot easily catch and collect non-payment.
I was pricing a new TV recently. I found it on the Internet for about $1,450 with no sales tax and free shipping. I found it at Costco for the same price but sales tax would be $126.88. Other than the additional consideration of having the TV delivered to the front door by UPS versus the Costco purchase requiring self-delivery, I think most people buying a TV this expensive would save the $126.88 and order it online.
Now, the online retailer is a business too… and they are absorbing the cost of shipping to keep their products competitive. However, there is still an unfair pricing advantage since the retailers located within CA are penalized by the state being forced to collect sales tax.
Several large internet retailers (Amazon.com for example) have closed all their affiliate operations in CA to allow them to sell in our larger consumer market at zero sales tax.
My idea is to tax out of state Internet sales at a reduced rate, and in-state (those retailers with affiliates in CA) at a lower rate than that. For example, tax out of state Internet sales at 5% and in-state at 2.5%.
The net result should be for more Internet retailers to be incentivized to move some of their operations to CA (jobs and business tax revenue), in order to have access to the rich CA consumer market at the lower sales tax rate.
The lower sales tax rates for Internet sales factor the cost of shipping and level the playing field for competition with local retailers.
This would be difficult to pull off (legal challenges, inter and intra-state rules and collection issues, etc.), but I think I would support something like this.
“Examining IRS tax return data by state, E.J. McMahon, a fiscal expert at the Manhattan Institute, measured the impact of large income-tax rate increases on the rich ($200,000 income or more) in Connecticut, which raised its tax rate in 2003 to 5% from 4.5%; in New Jersey, which raised its rate in 2004 to 8.97% from 6.35%; and in New York, which raised its tax rate in 2003 to 7.7% from 6.85%. Over the period 2002-2005, in each of these states the “soak the rich” tax hike was followed by a significant reduction in the number of rich people paying taxes in these states relative to the national average. Amazingly, these three states ranked 46th, 49th and 50th among all states in the percentage increase in wealthy tax filers in the years after they tried to soak the rich.
This result was all the more remarkable given that these were years when the stock market boomed and Wall Street gains were in the trillions of dollars. Examining data from a 2008 Princeton study on the New Jersey tax hike on the wealthy, we found that there were 4,000 missing half-millionaires in New Jersey after that tax took effect. New Jersey now has one of the largest budget deficits in the nation.”
“Or consider the fiasco of New Jersey. In the early 1960s, the state had no state income tax and no state sales tax. It was a rapidly growing state attracting people from everywhere and running budget surpluses. Today its income and sales taxes are among the highest in the nation yet it suffers from perpetual deficits and its schools rank among the worst in the nation — much worse than those in New Hampshire. Most of the massive infusion of tax dollars over the past 40 years has simply enriched the public-employee unions in the Garden State. People are fleeing the state in droves.”
ERM: [i]. . .how is this going to solve the state’s fiscal problems? [/i]
It wouldn’t, if as so much of a word of the ‘exodus’ was true. If past practice is any guide, no part of the “we’ll leave” statement is even vaguely true.
When you see stuff like this, those poll results probably aren’t surprising:
Transocean Bonuses: Oil Rig Co. Criticized For Safety Awards After 2010 Spill
[url]http://onlinejournal.com/artman/publish/article_7848.shtml[/url]
And of course GE not paying any income tax this year, the bank bonuses after receiving TARP funds, etc.
“And of course GE not paying any income tax this year”
GE is Obama’s Halliburten.
Tax the rich. Its more civilized than le guillotine.
For those of you who are really interested in the science of how to raise income on a stabilized basis, please see the article in this link, written by someone more familiar with how tax revenue works in CA than 99.9% of the people in this state [url]http://online.wsj.com/article/SB10001424052748704604704576220491592684626.html?KEYWORDS=California+tax+wealthy[/url]
This is the sort of thing which comes from high tax rates ([url]http://news.cnet.com/8301-30684_3-20020329-265.html[/url]). It’s dumb to bury your head in the sand and think high rates will mean high revenues. The reality is always to encourage income to move away and government revenues will decline.
Mr. Toad: without the rich, you cannot afford a guillotine. Maybe you could get an angry mob togther and stone them to death.
wdf1: Don’t get trapped in the “big bank bonus” propaganda. If the bankers are paid cash and they live in NY or CA (where most bankers live), then about 50% of it would got to the government in income tax. So what’s not to like about that if you are a tax and spend kinda’ person? If they are paid in stock, then they grow skin in the game to prevent the company from suffering losses in value. That is unless they are counting on the government to bail them out.
This reminds me of a story of two friends. One owns a business and is rather successful, earning a decent income. The other friend has tried hard but just hasn’t made the mark yet. The two agree to go out to dinner. When the bill comes the more successful friend picks up the bill and offers to pay because he knows he has more money than the other.
They walk out to the parking lot and the successful friend says, “Good night. It was good seeing you and we’ll have to do this again.” The less successful friend says, “What the hell! You haven’t paid for dessert yet.”
Good article Adam Smith but consider the source. Its not like the Fox News’ Wall Street Journal is the unbiased paper of record for the business community it once was before it was taken over. Anyway, its true that when California went to taxing everything at higher rates than property it destabilized its tax base. Its also true that everyone should pitch in to close the budget deficit. This article is about raising 2.5 billion from the rich constituting only about 10% of the deficit. Seems like a good a start and would set an example for the rest of us.
Mr. Toad –
I have little doubt that if the vote for higher tax on the wealthy would pass if came before he electorate. Unfortunately, it would only exacerbate the matching of revenues and expenses going forward. CA needs to slower its expenses (since current expenses were built on a non-sustainable base) and stabilize its revenue stream by getting rid of prop 13 and having a tax base less dependent on the incomes of the wealthy. Otherwise, we are forced to repeat this stupidity every few years.
Here is another example the Obama Administration’s great contributions to job creation in this country.
[url]http://www.personnelconcepts.com/white-papers/adaaa-regulations-explained/[/url]