2012 Tax Initiatives Chapter 3: The Guillotine Option - "Tax The Rich"

As of January 1, 2012, four "tax-the-rich" initiatives have been filed with the Attorney General:

1. The Unity High School Senior Class Free Resident Tuition for State Colleges Paid from Tax Increases on Incomes over $250,000 Initiative,
2. The Activist Heiress's California PTA Supported Proposal to Tax Millionaire Dad & Friends for Schools Initiative,
3. The Moonbeam Complex Free Up General Fund Money and Fix Nothing Tax Increase Initiative, and
4. The California Federation of Teachers & Friends Tax Millionaires for Education, Social Services, Safety Services, and Road and Bridge Maintenance Initiative.

The one currently getting the most press is the one filed by Governor Jerry "Moonbeam' Brown who issued a long letter to the "People of California" upon filing the initiative. In it he said, in part:

My proposal is straightforward and fair. It proposes a temporary tax increase on the wealthy...

• Millionaires and high-income earners will pay up to 2% higher income taxes for five years. No family making less than $500,000 a year will see their income taxes rise. In fact, fewer than 2% of California taxpayers will be affected by this increase.

Key issues related to context with regard to the State General Fund tend to be "old news" and therefore aren't explored by the press. And, in most cases, the key staff of the key newspapers in California - The Los Angeles Times, The San Francisco Chronicle, and The Sacramento Bee - are frequently "confused" by Moonbeam's spin, apparently cannot access the State's finacial history readily available on line, and frequently "misrepresent" the context.

In his letter, Governor Moonbeam referred to the unwillingness of the Republican minority to support a reasonable approach. For the most part, the three newspapers have repeatedly published attacks on the Republicans. This is understandable as the Republicans talk like ideologues (which may be all that they are). What the newspapers have not published repeatedly is the following information:

This chart shows that State General Fund spending rose 71% in a period when the combination of population and consumer price index growth justified a 42% increase. The Democrats were responsible for pushing the spending up, but now blame the Republicans for not helping with the deficit problem they, the Democrats, created.

The fact is, because of the obvious collapse in revenues due to The Great California Slump, enough Republicans along with the Republican Governor Arnold Schwarzenegger did approve temporary increases in the personal income and sales taxes for 2008-09 (also for 2009-10 and part of 2001-11) plus provided for accelerated collections of corporate taxes, all to prop up wildly excessive spending commitments some of which were directly approved by the voters.

The Republic legislators involved thought they were giving the Democratic majority a chance to put the State's financial house in order by reducing expenditures. Yeah, they're dreamers.

That's the honest context of the fight over tax increases. And it is boiling down to a public relations effort to make a part of 2012 conventional wisdom that the "tax-the-rich" mantra is "truth, justice, and the American way." Of course, real problems did develop during the first few years of The Great California Slump:

• Yes, during The Great California Slump education has taken an unprecedented hit in funding that must be corrected.
• Yes during The Great California Slump social and health services have taken a heavy hit in funding which combined with an increase in need is a problem for us all.
• Yes during The Great California Slump the State wasn't in a position to reduce the horrendous costs created by the good citizens who voted for the Three Strikes Law (the voters may support a proposed 2012 ballot measure in an attempt to correct this problem).
• Yes, during The Great California Slump revenues for schools, law enforcement, fire protection, etc., were horrendously impacted because of the good citizens who decided in 1978 through their votes for Proposition 13 that government shouldn't be supported by the stable property tax instead of the volatile income and sales taxes.

The funding problem is real because we made it that way voting our biases, prejudices, and selfish financial interests. And from a certain bias, the Republicans have called us on it by saying "don't spend so much," an idea that apparently makes many Californians grimace in pain.

In my introductory post on the initiatives, I reviewed the possible confusion over what constitutes  "the wealthy" or "the rich" from a general viewpoint. Let's review that term in terms of current tax policy to get some context. The Franchise Tax Board recently released income tax data for 2009 which offers this for context:

This tells us is that 64% of the folks filing tax returns paid 5% of the personal income tax California collected, and that 4% of the folks filing tax returns paid 55% of the income tax California collected.

For a cynical politician, it would appear getting approval from the voters to increase taxes on that 4% should be easy and the amount generated should be significant. The problem is that getting approval from the voters may be easy because it is a dumb idea on two accounts.

First, the swings in annual changes in adjusted growth income (the number that determines income tax revenue) in California in the 50 years between 1959 and 2009 look like this:

If California governments (including schools) had limited their spending budgets to a modest increase each year regardless of public's demand for new or expanded services, there would be no deficit problem today.

But the voters and the people who represent them lack the discipline needed to not spend all the money in their collective pocket.

When adjusted gross income, and therefore income and sales tax revenues, skyrocket we expand programs to spend it all.

That's our way in our private lives. Sales tax revenues wouldn't track as close to the AGI change as it does if the residents of California had any sense of economic discipline - because when their income goes up they spend it all (and more) creating higher sales tax revenue.

Our habits aren't going to change. So when we rely more heavily on personal income tax, we are setting our future selves up for failure.

And when we depend upon the income of billionaires, we make it worse. You don't have to do much research on this. The revenue from an already existing voter approved special 1% tax rate on income over $1 million fell 25% between fiscal years 2007-08 and 2008-09. Billionaires gamble with their future - that's how a some get richer and some don't.

The problem is you can't operate government like a business. Even if revenue falls by 20% we can't shut down one of five assembly lines like some manufacturer. The same number of school kids and college students still need classrooms and teachers. Criminal continue to commit crimes. Wildfires continue to burn. And clients for social and public health services climb.

Only fools fund their public services from volatile revenue sources. Welcome to California, the ship of fools, where financial irresponsibility is enshrined in our Constitution and in far too many of our lives.

The other problem with the "millionaires tax" is that increasing the tax burden on the personal income of the people who decide where to locate their businesses is betting against human nature. As I've explained in previous posts, Texas does not tax their businesses less. Simply, Texas does not have a personal income tax.

If you are a CEO, CFO, COO, or whatever, who is looking at paying $100,000 a year in state income tax in California versus none in Texas, why would you not relocate your business office and primary residence in Texas? Heck you can always keep your home in Carmel as a second home to visit. After all, the property tax on it is relatively low compared to Texas.

Sadly, it is more likely that the marketing spin on one of the "tax-the-rich" measures I will discuss in my next posts may appeal to voters.