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Taxing rich won’t solve boom-bust budget issues

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POSTED November 13, 2016 7:53 p.m.

LOS ANGELES (AP) — Though Californians voted to continue taxing the rich to bolster public schools and fund health insurance for the poor, keeping the status quo does not mend state government’s underlying fiscal frailty.

In some ways, the passage of Proposition 55 could subject California’s budget to greater volatility.

While the ballot measure helps stabilize funding for education and Medi-Cal, it increases California’s reliance on a small group of taxpayers whose fortunes determine the health of state spending that this year tipped $122 billion.

Proposition 55 extends until 2030 income tax increases that voters first approved four years ago, when school districts grappled with layoffs, ballooning class sizes and cuts to programs such as music. The tax kicks in at 1 percent for single filers who earn more than $263,000 each year, or $526,000 for families. Residents who earn more than $1 million annually will continue to pay an extra 3 percent of income to the state.

With Silicon Valley, Hollywood and other high-value industries, California mints enough millionaires that budget experts project the taxes will generate between $4 billion and $9 billion annually.

That range shows just how volatile income tax revenue can be.

Revenues can surge thanks to an exuberant Wall Street, but cuts are severe when the economy stalls. Political leaders from both parties have long talked about taming this boom-bust cycle but had little appetite for doing so once the revenues start booming again. A “rainy day” reserve that voters beefed up two years ago at Gov. Jerry Brown’s urging is now pushing $8 billion, which has helped.

Yet California remains vulnerable to fluctuations because revenue relies on the wealthy, whose income comes less from steady wages than investments such as stocks. About one-third of all revenue comes from taxing California’s top 1.5 percent of earners, according to number crunchers at the independent state Legislative Analyst’s Office.

The funding flow from Proposition 55 extends the taxes just long enough to last past the term limits for the current crop of state lawmakers. It could let elected leaders funnel more into favored social welfare programs or punt on finding savings elsewhere, such as overhauling public employee pensions.

Against this backdrop, Proposition 55 nudges California back toward less budget stability by creating an “incremental increase in volatility,” according to Ryan Miller, principal budget analyst at the Legislative Analyst’s Office.

And whenever the next recession hits, tax revenues from Proposition 55 might not be enough to shield public education and Medi-Cal from crippling cuts.

“It will certainly make things worse in terms of leaving the state vulnerable to fluctuations of the economy,” said Jon Coupal, president of the Howard Jarvis Taxpayers Association, which argues for lower taxes but did not mobilize against the ballot measure. No large activist groups did. Powered by tens of millions of dollars in union-backed spending, Proposition 55 passed Tuesday with 62 percent of the vote.

One lingering question remains: Is there the political will to refashion the state’s tax structure so that revenues are less volatile?

Probably not, though there is broad agreement in principle that tax reform makes sense.

“There are some inequities in our tax system, and we have to have that conversation,” said Eric Heins, president of the California Teachers Association union, which backed Proposition 55. “While we’re having that conversation, there’s still a first-grader in the classroom who needs to learn to read.”

 

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