The state's Democrats have launched a game of fiscal chicken with Gov. Schwarzenegger, proposing a budget that includes hikes in the top tax rates charged to California's wealthiest residents.
That means we'll be facing at least a month of public debate over the effect of tax rates on the state's overall economy, not to mention the relative justice of extracting funds from those most able to pay (i.e., the wealthy), rather than those who are scraping by.
The Democrats' proposal is to raise the top tax rate to 10% from today's 9.3% on married taxpayers earning from $285,000 to $570,000, and to 11% on incomes over that. The proposal, which is supposed to produce about $1.8 billion a year, is sure to elicit the usual claim from the governor and other taxophobics that raising tax rates always brings in less money than forecast, and even leads to general economic decline.
I'd like to save the governor the expense of a television campaign to market this argument by demonstrating in advance that it's drivel -- although it's certainly tenacious drivel.
For example, the Sacramento Bee's political columnist, Dan Weintraub, made this very argument in his weblog on June 1. As proof, he pointed to the three-year tax increase enacted in 1991 under Gov. Pete Wilson, which generated a mere fraction of the money expected. Weintraub observed that income tax revenue growth during the period was among the slowest in state history, and didn't take off until after the increase was rescinded in 1995. He seemed to be suggesting that raising the top tax bracket to 11% from 9.3% had actually suppressed economic growth, supposedly substantiating what he called the "much-maligned 'supply-side' theory on taxation."
Leaving aside that this point has been made in nearly identical terms by the California Taxpayers Assn., a conservative anti-tax lobby in Sacramento, the analysis is accurate as far as it goes -- the Wilson tax hike did fall short of expectations. The problem is that the analysis doesn't go far enough.
Neither Weintraub nor Cal-Tax mentions the other major state tax hike of postwar vintage -- the Reagan hike of 1967, which remained in force until 1985.
Their amnesia about Reagan's increase is unsurprising: It destroys their argument about Wilson's. Tax revenue during the Reagan era rose at a record pace of more than 15% a year, pushing California's annual receipts from $627 million to $11.4 billion. The resulting unexpected surplus stoked the citizen discontent about taxes that drove Proposition 13 to victory in 1978.
