Dan Walters: A perilous tax trend accelerates

dwalters@sacbee.comMay 17, 2013 

When voters passed Proposition 30 last year, they unwittingly accelerated one of the most perilous trends in California governmental finance – an ever-increasing reliance on income taxes from rich people to finance schools and myriad other state and local services.

When Jerry Brown became governor the first time in 1975, the broadly based sales tax was the biggest generator of state revenue.

Over the years, however, the sales tax has faded as consumer habits changed. Californians bought relatively fewer taxable goods – cars, clothes, appliances, etc. – and spent more of their incomes on untaxed services and investments.

Today, sales taxes are less than a quarter of general fund revenue and income taxes are more than half – much more. And the passage of Brown's Proposition 30, which raised the sales tax a smidgen but hit the richest Californians with a big income tax hike, accelerates that trend.

Income taxes now exceed 60 percent of general revenue and are headed to two-thirds within a few years, according to fine print in Brown's newly revised budget. The top 1 percent of Californians, in terms of income, now pay well over 40 percent of state income taxes or more than a quarter of general revenue.

There are anecdotal indications that some wealthy Californians are contemplating financial or physical moves to avoid the new levies – such as golfer Phil Mickelson's public musing about fleeing from California and its high taxes.

But the official assumption in the Capitol is that the wealthy will pay up and that income taxes will grow about 7 percent a year through 2016-17. Even if they continue to pay, however, the increasing reliability on high-income taxpayers is perilous.

For one thing, as the last – and still lingering – recession demonstrated, incomes of the rich, and therefore the taxes they pay, are much more volatile than those of lower-income taxpayers because so much of their income comes from capital gains.

It's the biggest driver of the state's roller-coaster budgeting because, as Brown put it this week, the state is "betting on the stock market."

Secondly, the new income taxes on the wealthy are temporary and will abruptly end just before Brown completes his final term as governor, assuming he's re-elected. However, the extra spending they finance, especially for schools and shifting felons into local jails, is locked into the state constitution.

What happens circa 2018 when the extra income taxes have expired but the spending they finance remains on the books?

Do Brown and other Capitol politicians assume that voters will renew the added levies, that the two-thirds Democratic supermajorities in the Legislature will re-enact them, or that Brown will walk out the door and drop a big budget deficit on his successor?

Call The Bee's Dan Walters, (916) 321-1195. Back columns, www.sacbee.com/walters. Follow him on Twitter @WaltersBee.

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