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'Tax the rich' the opposite of reform

California is too dependent on the income tax. Brown's proposal would make the tax system even more of a bumpy ride.

May 21, 2012|George Skelton | Capitol Journal

SACRAMENTO — Gov. Jerry Brown defends his soak-the-rich tax proposal as just. And besides, he says, it's popular with the non-rich.

Never mind that it's the opposite of reform, that it would make California's roller-coaster tax system even more volatile.

But maybe things do have to get worse before they get better. The state treasury is starved for more revenue. The governor is trying to avoid massive cuts to K-12 schools and more swats at the universities. It's probably not practical to wait for reform.

Brown's November ballot initiative would whack the wealthy, raising state income tax rates by one percentage point for single-filers earning more than $250,000, by two points for those making more than $300,000 and by three points on earnings exceeding $500,000. Double those income thresholds for joint filers.

Currently, the top rate for million-dollar earners is 10.3%. Brown would jack it to 13.3%.

The governor also would tack on a token quarter-cent sales tax increase for everyone.

"In the last three decades, the most affluent in California have doubled their share of the state's income, so I think [the proposal] is fair," Brown told reporters last week while revealing a revised budget proposal that featured a deeper deficit hole.

"And, two, it appears to be what the people want when you survey them.

"So that's why I picked it."

Unfortunately, that's the way American political leaders increasingly concoct public policy. Their strategists conduct polls and interrogate focus groups to find out what sells, what's the most popular.

That's particularly useful for a governor who promised voters while running for the office that they'd have the final say over any tax increase.

Of course, voters are their own special interests. And what they want often is not the same as what's best for the state as a whole. On taxes and spending, voters usually want someone else to pay for the services they demand.

Soak the rich, not me, even if it does make the tax system less stable and chase the super-rich into tax shelters or out of state.

Until mid-March, Brown had been saying it would be more "fair" to tag the wealthy with a softer income tax hike and impose a stiffer sales tax increase on everyone. This plan would be "balanced," he insisted. "Everyone should share the burden."

But then he hooked up with the liberal California Federation of Teachers, a soul mate of the 99 percenters. And Brown's original proposal was rewritten into the unbalanced version that's apparently headed to the ballot.

I was curious whether Brown was correct about the most affluent doubling their share of California's income in the last three decades. I checked with the state finance department and the governor was on target, at least concerning the 1 percenters.

In 1980, the top 1% of earners reaped 10.4% of the state's personal income. By 2010, according to newly released figures, their share had grown to 21.3%.

A taxpayer must hit an adjusted gross income of about $436,000 before qualifying as a 1 percenter.

Here's the roller-coaster problem: While the top 1% earn roughly 21% of the income, they pay 41% of the tax. In 2007, before the stock market collapsed, they paid even more of the tax, 48%. In the next two years, their share declined to 37% as the state's total income tax revenue fell by 25%.

In 2010, the top 10% earned 48% of the state's income but paid 74% of the tax. You hit the top 10% after earning at least $129,000.

The logic: A lot of people should be paying more. On average, a family of four doesn't owe any state income tax until their earnings reach $50,200, according to the finance department. Most everyone should kick in something and have a little skin in the game.

We are too dependent on the rich and their capital gains. Unlike the federal government, California treats capital gains as ordinary income. No reduced rates.

As a result, ups and downs in the economy are exaggerated into peaks and valleys in Sacramento, a perpetual cycle of boom and bust that plays havoc with budgeting.

In fact, California is too dependent on the income tax, period.

In the next fiscal year, the income tax is projected to provide 67% of the state's revenue; the sales tax 23%. In 1980, it was about even: 35% income tax, 37% sales. But back in 1950, the income tax amounted to only 11% of revenue, the sales tax 59%.

The main reason for the reversal: We've switched from a retail- to a service-oriented economy. And services in California, unlike many other states, aren't taxed.

Buy a lawn mower and you pay a tax. Hire a lawn mower and there's no tax. Not that we should tax lawn mowing. But we should tax movie tickets and political ads. Lower the tax rate and broaden the tax base.

The entire tax code badly needs to be reformed and updated to 21st century needs. But that is virtually impossible while a two-thirds legislative vote is required to raise any tax — even if the hike is offset by the cut of another tax.

There's always hope that a few more reasonable legislators will be elected in the new open primary system — especially Republicans who are not disciples of anti-tax demagogues.

Until then it's soak the rich — before they flee the state.

george.skelton@latimes.com

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