[Hiltzik replies here. Note my comment, which points out that he didn’t read what I wrote.]
[Note the update below…]
My esteemed colleague (can you tell I was listening to the Alito hearings?) Michael Hiltzik has a column up in the Los Angeles Time business section today (he is the business columnist, after all) in which he explains that the Governor’s budget proposal can only be made fair by – wait for it – raising the income taxes on the highest-income Californians.
Other groups drafted to subsidize the wealthy include the disabled and poorest of the poor. The governor wants to delay a cost-of-living increase due next year for recipients of supplemental security income by 18 months, to July 2008. These recipients are, by definition, needy seniors, the blind, and the disabled. The proposal would deprive them of a total of $233 million, keeping the money for the general fund, over two budget years.
Another $307 million would be saved for the rich by withholding cost of living increases, or COLAs, scheduled to be paid to recipients of CalWORKS grants. The recipients generally are poor families with children.
My first post on Hiltzik dinged him for making exactly this argument back in November of 04.
The problem with doing this is that California is already highly dependent on high-income filers, and their income is variable.
In 2003, (the last year that the FTB has an Annual Report for -note, pdf) the top 5% of filers paid 58.8 of the personal income tax.
Since the personal income tax represented $33.7B of the $73.6B in revenues in the 03 budget, high income filers represented 58.8% of 45.8% of the budget, or 26.9% of the annual budget.
Since this represents 680,000 returns of the 13.6 million filed, it’s fair to say that half a million households provide about a quarter of the revenue to the state.
I think this is an amazingly bad idea. I don’t think that this is a bad idea because it’s unfair to the half-million rich households. I think it’s a bad idea because it builds insane levels of volatility into the state revenue stream.
Looking back on 2003 again, we note a few interesting things (go to page 14):
Exhibit Table B-1 Comparison by Taxable Years shows that, from taxable year 2000 to taxable year 2002, the total Adjusted Gross Income (AGI) declined from $829.5 billion in 2000, to $754.1 billion in 2001, to $731.2 billion in 2002, or an overall reduction of 11.9%. Consequently, the amount of personal income tax dollars deposited to the General Fund declined by 29.2%, from $40.4 billion in taxable year 2000, to $31.3 billion in 2001, to $28.6 billion in taxable year 2002.
The numbers of returns reporting incomes of $200,000 and above also declined between taxable year 2000 and 2002, as illustrated by the following table:
2000 = 414,746
2001 = 371,369
2002 = 349,845
There’s your fiscal crisis right there.
There’s an interesting research project, for someone with more time than I have, to decompose the state revenues for the past decade and really get to the bottom of this.
But by following Hiltzik’s plan, the state is in the position of a farmer with one cow. As long as the cow is healthy, all is well. But as soon as the cow gets sick…
Now taxing the hell out of the Malibu Mafia to pay for improving healthcare for the poor emotionally hits the all the right notes for me (I’m the Armed Liberal, remember). But I’m grown-up enough to notice that what feels good emotionally doesn’t necessarily make for good policy.
I wrote up some notions on tax policy back a few years ago. The notions are kind of wacky, but at least they make more sense than those Hiltzik proposed in our regional paper of record.
Hiltzik does make several other points in the column; the core is that we can’t do all the things we need to without some measure of “fiscal pain.” Since his previous columns have suggested that spending is fixed (or must grow) the fiscal pain he has in mind is simple – raise taxes. And particularly, raise taxes on the half-million.
That’s not fiscal pain, that’s fiscal suicide.
States don’t make spending decisions nimbly. There is very little in the state budget that can readily be cut back midyear when times get tough. And I won’t even talk about the farcical inability of the legislature to even pretend they are fiscally responsible.
Update: Check out the Legislative Analyst’s document on revenue volatility to get a sense of how significant a problem it is here in California.
–
And mobile. People are leaving California and, uh, taking their incomes with them. California isn’t the only state that has this problem. Many of the people in New Hampshire are tax refugees from Massachusetts (lovingly known as Taxachusetts).
When I read through the California state budget during the recall, it was apparent that the only real way to get control over the budget was to reduce state payrolls—transfer payments don’t make up enough of the budget to do the trick.
For purposes of discussion only I’ll simplify things by accepting the premise that strongly ‘progressive’ income taxes are needed in the name of fairness, even though over half the state’s income is presumably ‘regressive’ from the numbers provided.
The real problem with high marginal income tax rates is that they disproportionately punish people of generally modest income who’ve had a really good year — business, professional, sales, or even wage earners with lots of OT.
Since you repay debt, or invest in your business, with _after_-tax income, penalising a really good year takes re-lendable money away from banks, or from business capital investments (to expand and create _jobs_) and hands it to what is demonstrably the most inefficient allocator of capital on earth: government.
Setting aside for the moment my strong belief in very limited government, I think a reasonable reform would be to permit 5-year *_forward averaging_* of income more than X% above the trailing 5-year average.
If the really good year was a one-off event the taxpayer gets to keep a lot more of it for debt repayment or capex, and the state doesn’t get fooled into thinking it’s a steady income stream.
Fact of the matter is, high marginal tax rates on high income disproportionally penalises people trying to move (sustainably) into a higher income quintile.
Hindering economic mobility is _elitist_, not liberal.
Its a bad idea. The problem is that the wealthier a person is the easier it is to vote with their feet and escape the California income tax. If you are a multi-millionaire, how hard is it to set up a billing address in Nevada? The higher the tax rate goes the greater the incentive to transfer econominic activities (even only on paper) to other states.
Of course we could all grow up and quit thinking the productive owe the unproductive a living and a bureaucracy to eat it up.
The issue of the rich moving out of state is a continuation of the ‘problem’ of the rich, and businesses moving out of large cities and into the suburbs. It was not just because that’s where the workers were living, the taxes were lower.
If since over and over again. Raise taxes to help the needy, business flee the city, then the county and finally the state. Advocates, then cry that county taxes need to be raised, then state taxes and finally.. the Federal Govt needs to give us someone elses money because the tax base has been driven away.
The lesson is, allow private charities to take care of the needy. This of course would require a moral society and the liberal philosophy of hedonism may not a attuned to this.
Besides its harder to ask for money and having to prove your program works, easier to just have the government take/tax the money and not have to be accountable.
Thanks
I’ve never accepted the moral superiority of using the power of the state to coercively take money away from certain people to give to other people.
It’s all about the _thievery_, my friends. Note how at the state level, it’s harder to hide behind “national security” when trying to justify the thievery.
Frankly, our problem in CA is that we have a conveyor belt. Our taxes go to unionized employees. Money is moved automatically out of their paychecks and into union coffers. The Union money is spent electing Dem legislators. The Dem legislators expand the bureaucracy and bump their salaries.
And around we go again.
Another problem, which no one really talks about, is the increasing gap between those who pay taxes at all and those who operate in the cash economy. This year alone, the Legislative Analyst estimated the cash economy cost the state $6 billion in revenue. I think tax enforcement is weak because many immigrants are involved in the cash economy and no politician wants to be raked over the media coals. The FTB should enforce a One California tax policy instead of Many Californias, and the deficit would disappear.
http://www.ftb.ca.gov/amnesty/taxgap/
Or, Rob Reiner should pay it off.
California should raise taxes.
Illinois can use all the help it can get.
It could be worse, Illinois is trying to balance its budget on the backs of “keno gambling”:http://www.wbbm780.com/pages/2168.php
I remember that George Will said that you get more of what you subsidize and less of what you tax. It only stands to reason that taxing the hell out of income producers, and indeed income itself, creates an inherently volatile and ultimatly wonky and backward situation.
We need to completely reverse how we tax. We should tax “consumption rather than income.”:http://ixmanmortgage.blogspot.com/2005/10/real-tax-reform.html#comments
California’s “progressive” income tax rates are not only volatile, they are conducive to bad politics and bad citizenship. Virtually half the employed in California are off the income tax rolls (i.e., for a single taxpayer the lowest tax rate of 1% doesn’t kick in until earning $10,516 [for 2004]; taxpayers married filing joint with two dependents don’t pay taxes until earning $41,381). To be sure, these folks pay sales tax, but a fairer income tax scheme should distribute the burden more evenly. As for bad politics, it wasn’t just two years ago that Californians decided to tax their neighbors earning more than $1 million annually to fund mental health services. While its hard to feel the pain of millionaires paying an additional tax, the precedent has been set and already there is another initiative to raise taxes on individuals earning more than $400,000 and couples earning more than $800,000 to pay for universal public pre-school. Surely other initiatives and bills in the legislature to shift more costs of government to fewer taxpayers will follow.
I didn’t see property taxes listed as a revenue source in the budget. California taxes real estate doesn’t it?
PD Shaw, California has a very weird tax setup. In the “old days”, property tax was collected by the counties and spent by the counties (mostly passing it to school districts and cities). Now, it’s collected by counties, some (all?) of it is passed to the state, and the state spends money funding counties, cities, and school districts, in a rather convoluted way.
Brett: “Of course we could all grow up and quit thinking the productive owe the unproductive a living and a bureaucracy to eat it up.”
Each year, productivity increases. Fewer workers produce more goods. AI, robotics, and nanotechnology advances should accelerate this trend. Unskilled and low skilled labor will be less and less valuable. Even the moderately skilled may have fewer job opportunities. The nation will grow far wealthier, but a smaller fraction of the populace will have work that pays a living wage.
I don’t want a large bureaucratic nanny state. But I also don’t want hordes of “unproductive” people expressing their anger at a society that doesn’t give a damn. I don’t have answers, but I do know that answers are needed.
Ah, but property taxes aren’t the goldmine of wealth that CA wants them to be.
Back in the 70s, an initiative, Proposition 13, was passed. It limited the real estate tax on a piece of property to 1% of its PURCHASE PRICE (adjusted for inflation only) until the property is resold.
The state/county CAN’T raise the rate at which it is taxed, and CAN’T even tie it to the market rate (I think it can be reassessed by a max of 2% a year, but not otherwise.). This is a big reason why real estate is so hot in CA: whenever you buy in, you are doing yourself a wealth of prop tax savings over waiting another year. (This adds to the demand of course..) It’s also a reason that the state and counties need turnover in housing–they want desperately to raise the prop taxes up to current market rates.
As marginal tax rates go up, high-earners have more incentive to be creative about how their income is treated. At 30%, I suspect most folks will take income as personal, taxable income. At 70%, I imagine that a lot of effort goes into seeing how incoming dollars can be reclassified. The grey economy becomes more attractive for the same reasons.
In that regard, high marginal tax rates promote unproductive and counterproductive economic activity. But there’s no particular point at which lower/higher taxes becomes a good/bad idea, it’s a continuum.
It seems that the Hiltziks of the world always start with the supposition that the top marginal income tax rate is too low, just as the low-tax Republicans posit that it’s too high. Almost a religious belief in each case.
A great example of this is reading any of the band biographies from the British Invasion period. The top tax rate in England was approaching something like 90%, so all these millionaire bands would go to these ridiculous lengths to avoid paying it. I remember a story about Zeppelin- Jimmy Page and some of the band’s family members were in a bad car accident in Africa. They were flown back to England for emergency treatment but their manager had the plane circle before landing until midnight so they wouldnt get hit with an extra day in England. And these are artsy, liberal musician types who will go to more and more extraordinary lengths as the tax rates rise. Imagine what your typical cutthroat type A captain of industry does.
#5:
incredibly well said. sometimes the obvious smacks us in the face….
Taxes are out of hand in quite a few places.
One of my parents has built their own business, so they get nailed every year, both in their personal income and income for the business (which isn’t their money, but their operating budget comes out of it). I can tell you there are quite a few people who aren’t employed any more because of excessive and unpredictable taxes. The city here seems dead set on killing off any business they can.
I actually work fewer hours on purpose, because I found that if I work a few more hours a week – and make a little bit more – I actually start making, after taxes, a signifigant amount less per hour.
I would still make a little more overall, after taxes, but it sure as hell isn’t worth those extra hours worked, with which I could be doing other things. To add insult to injury, this year the local gov’t decided I had to pay almost $60 for the “priviledge” of having an occupation, more than a 500% increase from the previous year.
I work while going to school full time; somehow, I managed to get some grants. If I make more, I might lose them or not get as much.
I live fairly comfortably, and will have only a minor debt I can pay off after a couple of years (easily) once I graduate. It’s sort of pathetic, but I don’t actually need to get a job in my field; I’ve been going to school for so long that I’ve found a job I really like that pays the bills fine. The only reason I’m still in school is because I like school and enjoy the field; I’ll have all the time in the world to apply my education when I’m done.
So, I get paid (grants) for being a (relatively)broke-ass student, and I get penalized (taxed more) for working any extra hours. I have never taken welfare or enemployment (mostly because I’ve never been unemployed), but with the grants I get more money out of the government than I put in; I’d have to be an idiot to work *harder* with little tangible benefits just to change that. Good job, government.
I’d gladly pass up the grants and pay for my own education in exchange for a sane tax policy, but since I won’t get that, I’ll just take the money.
Even after I get my degree, I see no reason to work harder, or aspire to earn more. I refuse to “buy” a home and play the property tax game. I’m going to make the least amount I can and still pay the bills, buy stuff I want, and sock away appropriate savings. And I am certainly not the only person I know who has come to this conclusion. They can take their astronomical tax rates and shove them up their ass – I’m not going to help finance their little pork spending games.
The problem with your metaphor, Marc, is that it implies the relevant taxpayers will remain a herd, not a pack. Considering a reasonable fraction of them got there by decent intelligence and business judgment, that would seem a bit problematic. Let’s consider:
The state is already in credit watch due to the electricity market fiasco. Ahnuld want to put it further in debt to fund public works projects. The state employee retirement system is at least partially funded, but likely has a future liability overhang that will hit just as local government budgets go upside down due to public employee pension mandates imposed from the state level with funding.
Historically, California has managed to grow its way out of these little problems. But this time we’ve got the state mandating what amounts to a $90,000 minimum wage for programmers just as the software business goes global and commodity. The big hardware fabs were long ago driven out by regulation and costs. The big media business is under assault from citizens’ media with little geographic attachment. Biotech is what’s left, and in spite of the politically controlled stem cell venture fund, that’s increasingly geographically mobile as well. Finally, the state’s headed into a demographic inversion just like the rest of the country, at a pace moderated only by immigration by semi-skilled labor that largely can’t cover the costs of public benefits for their families.
The regional advantage that has made California what it is now is, is in danger of dissipating. Here you get the media mouthpiece for the state Dem party starting to talk about confiscatory policies. A rational response would be what? Take a drive through Incline Village and Reno and let me know.
Once more, I question the point of you posting anything even remotely like this on Winds of Change, AL. Your theoretically “liberal” position on tax policy is immediately used as a jumping off point for conservatives to make their oh-so-brilliant “taxation is theft” arguments.
You bemoaned that Atrios wasn’t “part of the debate” in your last post, but this thread isn’t a debate, this is an excuse for conservatives to shoot fish in a barrel.
Besides which, I’m pleased to point out as an _actual_ liberal, that your numbers are at least partially bogus. Gosh, the numbers of households reporting incomes above $200k declined between 2000 and 2002? That couldn’t possibly be a direct result of, say, the dotcom collapse and the general economic downturn, right? And certainly there’s no truth in the statement that the underlying economic effects that changed the number of high income earners are also gonna affect _any_ alternative tax base you suggest?
I don’t live in California, and the union situation there is definitely problematic – the state has real problems it has to fix. But it seems ridiculous in the extreme to suggest that the swarms of lawyers, doctors, businesspeople, Hollywood folks, etc. who inhabit the miles and miles of LA and Bay Area McMansions (and real mansions) are somehow an endangered species – that the state of California will wake up tomorrow and discover that all the rich people have ditched their Pacific coast lifestyles and moved to the Arizona desert in pursuit of lower tax rates. Right.
Chris, you miss my point; the problem with overrelying on a narrowly focused tax on a volitile commodity is that you get wild swings in sttae revenue, which are not coducive to good fiscal planning. See the addendum for more.
I’m not against taxing rich people progressively as a policy. But my guess is that in California the progressive income tax isbeing taken about as far as it can go, and we need to look at other revenue sources if we’re going to increase revenues.
A.L.
Go back to the original statistic. Do the research to figure out how much of the INCOME is earned by the top 5%. Repeat the entire analysis. The 5%/58% of tax paid analysis is simply, misleading at best and bogus at worst. Every time I have done this analysis on the fed level it turns out that the top whatever percent also earn an astoundingly high percentage of the overall income.
However, its hardly worth writing an article which states that persons who earned, say 29.5% of the income paid 32.45% of the income tax. That seems like a boring statistic, not some sort of “oh wow” look at how progressive taxes are! epiphany.
Hank, you flatly miss my point. I don’t care about whether it’s “fair” to the richest 5% to pay 58% of the tax – actually, I do, I think it’s more than fair – but I think it has an obvious and pernicious effect on the health of state government for the reasons I explain.
And when state government goes through fiscal collapse, the 5% won’t care – they can pull back into their gated communities and private schools, screwing the other 95%. I think that’s a problem, don’t you?
A.L.
Well, to keep the posts readable, let me put it another way (i) that initial statistic is mostly used to imply that the wealthy are getting screwed when the overall (sales, income, property) tax system is already fairly flat, (ii) the reality is that I am not sure there is much of a choice.
For example, lets say, and I haven’t looked this up, that it turns out that the top 5% make 46.7% of the income (based on my looking at the fed figures, I would not be surprised if it was something like that). And lets further say you lowered the tax brackets down to where the top 5%, instead of paying 58% of the income taxes paid exactly 46.7%.
That might correspond to reducing the percentage of the overall budget paid by the top 5% from 26 whataver to 22 or so. There is no way you could ever get it to where the top 5% paid 5% of the income tax without it being spectacularly regressive.
> There is no way you could ever get it to where the top 5% paid 5% of the income tax without it being spectacularly regressive.
Even the fish-in-barrel-shooting conservatives who apparently write WoC comments (granting #23’s characterization) would be appalled by Montgomery Burns’ tax bill equalling that of a Wal-Mart greeter. That’s not a plausible outcome of a just (never mind workable) tax policy.
The main reason that having a highly progressive tax structure makes revenues unstable (setting aside questions of fairness) is that the incomes of the wealthy fluctuate more dramatically than others’ incomes over the economic cycle.
A business owner or other wealthy person may make hundreds of thousands or even millions of dollars in a good year — but may make much less, or even lose money, in a down year. On the other hand, with middle- and lower-income wage earners, a recession doesn’t have the same effect. For a person earning $40,000 a year, even a dramatic pay cut (say 25%) only reduces taxable income by $10,000.
Even with those who actually lose their jobs — and even a bad recession, in recent history, has meant little more than an additional 5% of the work force becoming unemployed — reduces taxable income by relatively little when compared to a profit-earner whose profits decline dramatically.
This is one of the best arguments for a consumption tax (my USC tax law professor, Ed McCaffrey, wrote a book, I believe, making the liberal argument for such a tax, which he advocated should have a large personal exemption to keep it progressive and make consumption for basic necessities tax-free.) While the income of a wealthy person may decline dramatically during a recession, his consumption often will not: He’ll just live off previously-accumulated profits.
A consumption tax, on the other hand, would tax such a person regardless of whether he was having a good year or a bad year. It would also minimize the negative effect, mentioned by a poster above, of the tax code’s 1-year focus, which penalizes people whose yearly income tends to fluctuate.
bq. Chris, you miss my point; the problem with overrelying on a narrowly focused tax on a volitile commodity is that you get wild swings in sttae revenue, which are not coducive to good fiscal planning. See the addendum for more.
Well, yes, that is slightly different from what I thought you were saying, and I apologize. But the problem’s far from unique to California: Texas and Alaska have both similarly fixated on oil revenues as a main revenue source in the past, and have seen major fluxuations because of it. The problem is, that variation in and of itself isn’t necessarily a reason to wean the state away from a major cash cow – you have to demonstrate that the state can make (nearly) as much money while increasing stability. Stability in and of itself is only of limited use: most people would far rather be earning big bucks in the risky world of (for example) futures trading than pulling in a nice, steady salary as a city bus driver.
I also disagree that the situation’s not conductive to good fiscal planning: it’s an argument _for_ good fiscal planning in the first place, since (theoretically) there’s nothing difficult about saving the excess in fat times for the shortage in lean times. How that gets applied to the mess of California politics is, of course, a much more difficult matter.
bq. I’m not against taxing rich people progressively as a policy. But my guess is that in California the progressive income tax isbeing taken about as far as it can go, and we need to look at other revenue sources if we’re going to increase revenues.
Such as? Until you come up with some concrete suggestions, I do stand by my observation that this post is basically an excuse for conservatives to bash taxation in general.
It sounds like California taxes property at a low rate and not even at its market value. The advantage of property taxation is that it tends to be less cyclical and it ensures contributions to tax revenues by those who inherit wealth. It seems to me like those are circumstances that justify a fairly progressive income tax rate.
Any state rate that gets too high is going to have avoidance problems, particularly at the high end. Most states don’t tax services, which creates market distortions as more of the economy becomes services based. I liked this idea of a “progressive consumption tax,”:http://www.newamerica.net/index.cfm?pg=article&DocID=1452 but it was proposed as a federal tax (with complete elimination of taxes on wages).
“I liked this idea of a progressive consumption tax, but it was proposed as a federal tax (with complete elimination of taxes on wages).”
I kinda like that as well, although its sort of counterintuitive seeing as we want to encourage consumption. Still, i tend to think it would encourage saving in the lower wage earners and capital investment in the upper.
Milton Friedman says that if government stopped sucking blood (sucking some sweat is OK) we could have an economy that grew at 10% a year.
Which is better for the poor? A government hand out or an economy on fire?
As I said PD – Illinois can use all the help it can get. And why Keno? Our governor has promised no tax raises and he has taken the “raise fees” bit as far as it will go.
In any case if the rich pay most of the taxes they own the government. It may be “progressive”. The real question is – is it wise?
“Concentration of wealth is a natural result of concentration of ability, and recurs in history. The rate of concentration varies (other factors being equal) with the economic freedom permitted by morals and the law… democracy, allowing the most liberty, accelerates it.”
— Will and Ariel Durant
It is a liberty issue. And a growth issue. It is not just about money for the state.
You can read the rest at “Winds of Change”:http://windsofchange.net/archives/003736.html or “Power and Control.”:http://powerandcontrol.blogspot.com/2004/11/profit.html
Want more gold? Feed the goose. Want less gold? Strangle it.
entered by Marshal Festus for M. Simon
Chris –
“Until you come up with some concrete suggestions, I do stand by my observation that this post is basically an excuse for conservatives to bash taxation in general.”
Um, Chris, didja see the link in this phrase?
“I wrote up some notions on tax policy back a few years ago. The notions are kind of wacky, but at least they make more sense than those Hiltzik proposed in our regional paper of record.”
A.L.
The problem in California is that the flush years encourage not capital investment (roads, sewers, transit, schools, parks etc) but increased State employment as bureaucracies expand. THAT is bad.
Critical capital investment (we really have had very little since Pat Brown in the late 60’s) gets thrown out and we have layoffs that are horrifically bad politically of state workers.
So what do we do? Tax policies (residential housing revenues post Wilson all go to the State) encourage big box retailers because the sales tax goes to the localities and there is minimal infrastructure required. As opposed to roads, sewers, schools etc for housing.
Swings in state income GUARANTEE this volatility which makes ESSENTIAL capital investment hard to plan and see-saw state employment. [Yes I agree with generally Arnold’s plan to launch a Pat Brown type infrastructure building effort. Too bad it wasn’t Dems who proposed this New Deal effort]
All that being said, California has suffered greatly from the Collapse of Aerospace which offered a much larger middle class tax base and manufacturers who could be taxed at reasonable rates and not just move away. Dems loved the collapse of mostly Anglo middle class aerospace workers in the early 90’s because it made California very shortly very Democratic as these guys all moved away.
PART of Tax reform to reduce volatility must be linked to economic development. Yes, it is VERY possible for folks like George Lucas or Steven Spielberg to move to other places; and for dot-commers etc to fall out of the money. I submit it’s bad policy to base Statewide employment and capital spending on these wild swings (Gray Davis said so). Better a large middle class tax base and middle-class employers (also taxed).
Rockford – bite me and then get your head out of your ass. While the SoCal Aerospace industry did indeed go in the tank in the late 80’s early 90’s for the past five years it has been hiring new grads like crazy. A lot of the new engineers are Asians so maybe they are not your kind of middle class people.
If you want to fix California you need to overturn prop 13 and then do away with the 2/3 vote needed to raise taxes. (The no tax zealots need to realize their is work to be done and the state needs money to pay for it) Then you you early retire all state employees who are over 60 and as part of the deal you take clawbacks on some of their pension benefits. Someone so revisity the prison guard contract as well. You increase the vehicle registration fee and the gas tax to pay for infrastructure and mass transit.
If you are really smart you start planning what you are going to do when the water starts to run out in 40 years.
I’m thinking you meant “get your head out of your ass and then bite me”, which would be more anatomically correct.
On the other hand you could, you know, chill just a tad.
Well, there’s something I agree with.
“It sounds like California taxes property at a low rate and not even at its market value. The advantage of property taxation is that it tends to be less cyclical and it ensures contributions to tax revenues by those who inherit wealth.”
“If you want to fix California you need to overturn prop 13”
In a nutshell, for those who are not from the Golden State, Proposition 13 was enacted in the late 1970s because residents were losing their homes due to skyrocketing property rates. What 13 does is limit the amount of property tax that can be assessed to a certain percentage of the previous year.
However, every time a house is sold— or if it is razed and rebuilt— the tax is recalculated from scratch. At the moment, the state is a haven for “flippers”, people who buy a property with the intention of selling it in a short period of time to make money. Given the spiralling rate of property value— Sacramento resale prices, if I recall correctly, have risen almost 65% in the past three years— this is a major incentive to “flip.” Property taxes are not being held down as much as they are in a slow housing market.
But the problem with repealing Prop 13 is those same rising house costs. My parents bought their home for $30K, and houses in their neighborhood are selling for $400K. That level of property tax would require them and many others to sell, and the glut of houses would cause an immediate downturn in the market, especially as buyers would have to worry about their houses being, essentially, priced out from under them.
And incidentally, under certain other statutes, property tax is put into a common state pool and shared out among educational districts. Many a rich neighborhood has a poor school due to this practice.
California’s tax code is certainly byzantine, and one has to remember that the only thing that is certain in lawmaking is the Law of Unintended Consequences.
Great discussion. I have two observations; First if they ever get around to revising the Federal Income tax code it is possible that Californian’s (amongst other states) may lose the state income tax deduction along with a greatly reduced or eliminated mortgage deduction. I don’t think the possibility of one or both of those things happening should be entirely discounted, and could really throw California’s economy into turmoil.
Second; as a small business owner who is in the statistically ‘rich’ category (top 1% of Federal / State taxpayers) I notice what is always missing from these conversations is that a lot of the people in the upper tax brackets work like hell for their money. Small businesses create jobs, wealth and react more nimbly to economic shifts. Yet the message of the tax code seems to be to punish you if you succeed. And it’s not as if we’re not already shouldering a disproportionate percentage of the taxes. (In 2000 the top 1% paid 29% of Federal Taxes; the top 5% paid 50% of Federal Taxes)
It kills me when I read Warren Buffet complaining he’s not paying enough Federal Taxes, well good for him, let him pay more, but if you’re in the $500,000-5,000,000 zone you still feel the taxes.
And yes, I would seriously consider relocating to Nevada or Arizona to escape onerous state taxes.
I think the difficult issue is striking a balance between being a ruthlessly capitalistic society and a socialist state that over reaches to provide services that are not economically feasible.
I hope California gets back on a fiscally tenable course before it’s too late.
/Los Angeles
AL-
bq. Um, Chris, didja see the link in this phrase?
bq. “I wrote up some notions on tax policy back a few years ago. The notions are kind of wacky, but at least they make more sense than those Hiltzik proposed in our regional paper of record.”
I admit that it was poorly worded on my part, but considering that A) those ideas weren’t exactly the main thrust of the post, B) you undercut those notions yourself by calling them “wacky”, and C) within the link you’re essentially arguing for jacking up a regressive sales tax in one of the wealthiest states in the country, all in the name of stability… yeah, I still maintain you’re not making a particularly strong argument for progressive economic theory.
Chris, not to (totally) chide you, but you have to read it more carefully (plus I need to write more clearly, I guess). The notion is to increase the sales tax, and then use part of the money to pay the Feds payroll taxes (SSI, Medicare, etc.) from lower-income wage earners then allow employers to pay employees the additional money. If you wanted to be _really_ progressive, you could also pay the employer’s portion, and have them pass that on to the employee.
How’s that regressive.
A.L.
Marc is exactly right. California relies heavily on income tax revenue from high bracket taxpayers. According to the “Franchise Tax Board”:http://www.ftb.ca.gov/aboutftb/annrpt/2003/2003ar.pdf 24,939 state tax returns showed income over $ 1 million in year 2002. These high-income returns were just 0.2% of the 13.5 million filings, but they reported 10.2% of all income in the state and they paid 21.6% of the tax – over $6 billion.
Income at the top tends to be from capital, not labor, and tends to vary a lot from year to year. That FTB report says that wages & salaries are 75% of all income in California, but represent only half the income on returns above $200,000. These folks made up 2.5% of all taxpayers, but got 36% of all interest income, 44% of all dividends and 85% of all capital gains. And capital gains in particular swing wildly with stock market fluctuations – “according to the IRS”:http://www.irs.ustreas.gov/pub/irs-soi/02intba.xls the national total for capital gains fell from $630 billion in year 2000 to just $239 billion in year 2002.
This creates major problems for California’s state finances. State income tax revenues, which are about 50% of the total General Fund, are leveraged to the stock market. As a result, the state budget depends on forecasts of the future mood on Wall Street, which are about as reliable as Ouiji board readings.
The budget that Governor Narcissus unveiled earlier this month covers the fiscal year that starts in July 2006 and runs to June 2007. The key month for state tax receipts is April, 2007 because that’s when taxpayers will file year 2006 returns and pay any balances due. (The “Department of Finance”:ftp://ftpgovbud.dof.ca.gov/pub/BudgetSummary/BS_SCH5D.pdf tells us that in most months the state will run a deficit, but counts on covering it when the April tax payments come in.)
How reliable are the revenue forecasts? Not very. For 1999-00, for example, the governor’s budget expected $32.66 billion in state income tax revenues, but the actual amount was $39.27 billion – higher by $6 billion, or more than 20%. Two years later, the budget forecast was for $41.99 billion but actual receipts came in at $33.29 billion, off by more than 20% in the other direction — and goodbye to Gray Davis. Historically, the standard deviation of the forecast error is 13.2% — meaning there’s a 1 in 6 chance that revenue will be more than 13.2% above the estimate, and a 1 in 6 chance that receipts will be less than 86.8% of the budget target. A fuller explanation is “provided here”:http://taxprofessor.blogspot.com/2005/02/schwarzeneggers-monkey-finger-ouija.html
The newest budget proposal by Governor Narcissus uses a surge in current tax receipts to try to buy back his popularity before election day. It sets the state up for yet another fiscal disaster if the economy softens or the market declines during the year. The sound bites have it completely backwards — California doesn’t have a spending problem, it has a revenue problem – or to be more precise, it has a Governor problem.
Much as I respect Warren Buffet and others coming out against Prop 13, the bottom line is that giving the state the chance to fix their imcompetent governance on the backs of homeowners is not the answer. With the average home price over $500k, most of the homeowners in CA who purchased prior to the most recent run up in prices wouldn’t be able to own a home without the protection of Prop 13.
If you want a real look at California’s financial mismanagement, take a gander at the California Piglet Book (care of Citizens Against Government Waste):
http://www.cagw.org/site/DocServer/California_Piglet_Final_with_cover.pdf?docID=1361
“raising the income taxes on the highest-income Californians”
First, however, they’ll have to find a way to keep those to be taxed from leaving when the taxes get too high.
#30 Chris: “variation in and of itself isn’t necessarily a reason to wean the state away from a major cash cow – you have to demonstrate that the state can make (nearly) as much money while increasing stability.”
In portfolio theory one speaks of an efficient frontier that defines the ultimate trade-off of volatility and return. I’d be skeptical that CA can hold return constant while substantially decreasing volatility. Everyone else on Earth trades risk for return; why should state govt expect to do otherwise?
“Stability in and of itself is only of limited use: most people would far rather be earning big bucks in the risky world of (for example) futures trading than pulling in a nice, steady salary as a city bus driver.”
I dunno. Speaking from first-hand experience as an entrepreneur who has tried to talk countless bus drivers into becoming futures traders (uh, not literally 🙂 I find this assertion absolutely false. I was surprised to learn how risk-averse even ultra-talented people with no dependents can be, and I’ve seen it among both suits and geeks. Stability is huge, both to individuals and to portfolios — and if you don’t believe that, then you need to explain why trillion dollar industries exist to manage & provide it.
#40: “I think the difficult issue is striking a balance between being a ruthlessly capitalistic society and a socialist state that over reaches to provide services that are not economically feasible.”
Well said. And in re leaving, I came to CA for one reason: the opportunity. I would be willing to leave CA. A lot of my peers have.