Dan Walters: Jerry Brown's tax increase is a big risk

"Soak the rich" has a populist ring that resonates in a period of economic uncertainty, and making the rich pay their "fair share" of taxes has become a rallying cry for those on the political left with no small appeal to those in the middle.

Gov. Jerry Brown hopes to tap into that sentiment with a ballot measure that would increase everyone's sales taxes a bit while hitting the very affluent with higher income taxes.

If he's successful, however, there are downside risks, beginning with the possibility that some will move legally, if not physically, to states with lower or even no income taxes, such as Nevada.

And even if there's no mass migration, the rich can employ tax-avoidance strategies, especially since their incomes tend to come from capital gains rather than salaries.

Finally, even if the rich pay higher taxes, the effect would be to sharply increase the state's dependence on how a relative handful of Californians are doing with investments – in effect, tying the state budget even more closely to the vagaries of the stock market, rather than the overall economy.

Three-plus decades ago, when Brown was serving his first stint as governor, income taxes accounted for less than a third of state revenues and sales taxes for nearly 40 percent.

Since then, however, changes in consumer spending patterns have depressed taxable sales, relative to personal income, while a progressive income tax has expanded its role in state finance to generate more than half of the general fund revenue stream.

If Brown's tax hike performs as he projects, income taxes would rise to well over 60 percent while sales taxes would shrink to scarcely 20 percent – in part because he also wants more sales taxes to flow to local governments rather than the state.

And with the most affluent taxpayers – a few hundred thousand Californians in a state of 38 million – paying over half of those income taxes, the state's dependency on them would increase exponentially.

Those taxpayers have the highest levels of income volatility, so the state's revenues are becoming more volatile. The $5 billion gap between Brown and the Legislature's budget analyst, Mac Taylor, in their latest revenue estimates testifies to that syndrome.

"We're focusing on these high-income taxpayers," Taylor said this week, adding that it creates "even greater volatility (and) a growing problem."

A blue-ribbon commission appointed by then-Gov. Arnold Schwarzenegger and the Legislature devoted months to volatility and recommended flattening the income tax and expanding the sales tax, with another name, to services.

It went absolutely nowhere, and ever-increasing revenue volatility is having a corrosive effect on the budget process, making it more of a crapshoot than a rational deliberative process.